United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 2007
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
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Commission File No. |
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Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone No. |
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IRS Employer Identification No. |
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000-49965 |
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MGE Energy, Inc. (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mgeenergy.com |
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39-2040501 |
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000-1125 |
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Madison Gas and Electric Company (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mge.com |
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39-0444025 |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of Class |
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MGE Energy, Inc. |
Common Stock, $1 Par Value Per Share |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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Title of Class |
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Madison Gas and Electric Company |
Cumulative Preferred Stock, $25 Par Value Per Share |
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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MGE Energy, Inc. Madison Gas and Electric Company |
Yes [X] No [ ] Yes [ ] No [X] |
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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MGE Energy, Inc. Madison Gas and Electric Company |
Yes [ ] No [X ] Yes [ ] No [X ] |
Indicate by checkmark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by checkmark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:
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MGE Energy, Inc. |
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Madison Gas and Electric Company |
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Large accelerated filer |
X |
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- |
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Accelerated filer |
- |
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- |
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Non-accelerated file |
- |
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X |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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MGE Energy, Inc. Madison Gas and Electric Company |
Yes [ ] No [X] Yes [ ] No [X] |
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2007, was as follows:
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MGE Energy, Inc. |
$707,462,316 |
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Madison Gas and Electric Company |
$0 |
The number of shares outstanding of each registrant's common stock as of February 1, 2008, were as follows:
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MGE Energy, Inc. Madison Gas and Electric Company |
21,970,785 17,347,889 |
Documents Incorporated by Reference
Portions of MGE Energy, Inc.'s definitive proxy statement to be filed on or before April 14, 2008, relating to its annual meeting of shareholders, are incorporated by reference into Part III of this annual report on Form 10-K.
Madison Gas and Electric Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore omitting (i.) the information otherwise required by Item 601 of Regulation S-K relating to a list of subsidiaries of the registrant as permitted by General Instruction (I)(2)(b), (ii.) the information otherwise required by Item 6 relating to Selected Financial Data, (iii.) the information otherwise required by Item 10 relating to Directors and Executive Officers as permitted by General Instruction (I)(2)(c), (iv.) the information otherwise required by Item 11 relating to executive compensation as permitted by General Instruction (I)(2)(c), (v.) the information otherwise required by Item 12 relating to Security Ownership of Certain Beneficial Owners and Management, and (vi.) the information otherwise required by Item 13 relating to Certain Relationships and Related Transactions.
Table of Contents
Where to Find More Information
Item 1B. Unresolved Staff Comments.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - MGE Energy and MGE.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 10. Directors, Executive Officers, and Corporate Governance.
Item 11. Executive Compensation.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Item 15. Exhibits and Financial Statement Schedules.
Signatures - Madison Gas and Electric Company
Filing Format
This combined Form 10-K is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information.
Forward-Looking Statements
This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied. The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant a) include those factors discussed in Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, and b) other factors discussed in filings made by that registrant with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this report.
Where to Find More Information
The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services and the web site maintained by the SEC at http://www.sec.gov.
Our Internet site addresses are www.mgeenergy.com and www.mge.com. On our sites, we have made available, free of charge, our most recent annual report on Form 10-K and proxy statement. We also provide, free of charge, our other filings with the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on MGE Energy's and MGE's web sites shall not be deemed incorporated into, or to be a part of, this report.
Definitions
Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.
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AFUDC |
allowance for funds used during construction |
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ALJ |
Administrative Law Judge |
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Alliant |
Alliant Energy Corporation |
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ANR |
ANR Pipeline Company |
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APB |
Accounting Principles Board |
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APBO |
Accumulated Postretirement Benefit Obligation |
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ARB |
Accounting Research Bulletin |
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ATC |
American Transmission Company LLC |
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ARO |
Asset Retirement Obligation |
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BART |
Best Available Retrofit Technology |
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Blount |
Blount Station |
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CAIR |
Clean Air Interstate Rule |
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CAMR |
Clean Air Mercury Rule |
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CO2 |
carbon dioxide |
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Columbia |
Columbia Energy Center |
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cooling degree days |
Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, increasing demand for cooling |
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CWDC |
Central Wisconsin Development Corporation |
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DNR |
Wisconsin Department of Natural Resources |
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Dth |
dekatherms |
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Distribution Agreement |
Distribution Agreement between MGE Energy and J.P. Morgan Securities Inc. |
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EITF |
Emerging Issues Task Force |
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Elm Road |
Elm Road Generating Station |
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EPA |
U.S. Environmental Protection Agency |
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EPC |
Engineering, Procurement, and Construction |
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FASB |
Financial Accounting Standards Board |
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FERC |
Federal Energy Regulatory Commission |
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FIN |
FASB Interpretation No. |
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FSP |
FASB Staff Position No. |
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FTR |
Financial Transmission Rights |
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GCIM |
gas cost incentive mechanism |
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GHG |
greenhouse gas |
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heating degree days (HDD) |
Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, increasing demand for heating |
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IBEW |
International Brotherhood of Electric Workers |
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interconnection agreement |
Generation-Transmission Interconnection Agreement |
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kV |
kilovolt |
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kVA |
kilovolt ampere |
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kWh |
kilowatt-hour |
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lbs |
pounds |
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LIBOR |
London Inter Bank Offer Rate |
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LIFO |
Last-in-first-out pricing |
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MACT |
Maximum available control technology |
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MAGAEL |
MAGAEL, LLC |
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MAIN |
Mid-America Interconnected Network, Inc. |
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MGE |
Madison Gas and Electric Company |
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MGE Construct |
MGE Construct LLC |
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MGE Energy |
MGE Energy, Inc. |
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MGE Power |
MGE Power LLC |
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MGE Power Elm Road |
MGE Power Elm Road, LLC |
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MGE Power West Campus |
MGE Power West Campus, LLC |
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MGE Transco |
MGE Transco Investment LLC |
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Midwest ISO |
Midwest Independent System Operator (a regional transmission organization) |
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MMBtu |
million British thermal units |
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Moody's |
Moody's Investors Service, Inc. |
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MRO |
Midwest Reliability Organization |
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MW |
megawatt |
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MWh |
megawatt-hour |
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NAAQS |
National Ambient Air Quality Standards |
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Nasdaq |
The Nasdaq Stock Market |
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NERC |
National Electric Reliability Council |
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NNG |
Northern Natural Gas Company |
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NOx |
nitrogen oxide |
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NR |
Natural Resources |
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NSPS |
new source performance standards |
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OPEIU |
Office and Professional Employees International Union |
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PGA |
Purchased Gas Adjustment clause |
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PJM |
PJM Interconnection, LLC (a regional transmission organization) |
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PSCW |
Public Service Commission of Wisconsin |
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RSG |
Revenue Sufficiency Guarantee Charge |
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RTO |
Regional Transmission Organization |
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SAB |
Staff Accounting Bulletin |
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SEC |
Securities and Exchange Commission |
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SECA |
Seams Elimination Cost Adjustments |
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SFAS |
Statement of Financial Accounting Standards (issued by the FASB) |
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SO2 |
sulfur dioxide |
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the State |
State of Wisconsin |
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Stock Plan |
Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy |
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USW |
United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union |
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UW |
University of Wisconsin at Madison |
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VIE |
Variable Interest Entity |
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WCCF |
West Campus Cogeneration Facility |
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WDNR |
Wisconsin Department of Natural Resources |
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WEPCO |
Wisconsin Electric Power Company |
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Working capital |
current assets less current liabilities |
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WPDES |
Wisconsin Pollutant Discharge Elimination System |
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WPSC |
Wisconsin Public Service Corporation |
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WUMS |
Wisconsin and Upper Peninsula of Michigan System |
PART I.
Item 1. Business.
MGE Energy operates in the following business segments:
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Electric utility operations—generating, purchasing, and distributing electricity through MGE.
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Gas utility operations—purchasing and distributing natural gas through MGE.
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Nonregulated energy operations—constructing, owning, and leasing new electric generating capacity that will assist MGE through MGE Energy's wholly owned subsidiaries MGE Power, MGE Power Elm Road and MGE Power West Campus.
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Transmission Investments—investing in companies engaged in the business of providing electric transmission services, such as ATC. In the fourth quarter of 2005, the investment in ATC was transferred from MGE to MGE Transco.
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All Other—investing in companies and property which relate to the regulated operations, financing the regulated operations, or providing construction services to the other subsidiaries through its wholly owned subsidiaries MGE Construct, MAGAEL and CWDC, and Corporate functions.
MGE's utility operations represent a majority of the assets, liabilities, revenues, expenses, and operations of MGE Energy. MGE Energy's nonregulated energy operations currently include a undivided interest in the assets of the West Campus Cogeneration Facility. MGE Power West Campus owns 55% of the facility, which represents its interest in the electric generating assets and the UW owns 45% of the facility, which represents their interest in the steam and chilled water assets. The UW's share of the plant and portion of the earnings from the WCCF are not reflected in the consolidated financial statements of MGE and MGE Energy. Nonregulated energy operations also include an undivided 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin.
As a public utility, MGE is subject to regulation by the PSCW and the FERC. The PSCW has authority to regulate most aspects of MGE's business including rates, accounts, issuance of securities, and plant and transmission line siting. The PSCW also has authority over certain aspects of MGE Energy as a holding company of a public utility. FERC has jurisdiction, under the Federal Power Act, over certain accounting practices and certain other aspects of MGE's business.
MGE Energy's subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal. See "Environmental" below.
MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized as a Wisconsin corporation in 1896. Their principal offices are located at 133 South Blair Street, Madison, Wisconsin 53703.
Electric Utility Operations
MGE generates and distributes electricity in a service area covering a 315 square-mile area of Dane County, Wisconsin. Its service area includes the city of Madison, Wisconsin.
At December 31, 2007, MGE supplied electric service to nearly 136,000 customers, with approximately 89% located in the cities of Fitchburg, Madison, Middleton, and Monona and 11% in adjacent areas. Of the total number of customers, approximately 87% were residential and 13% were commercial or industrial. Electric revenues for 2007, 2006, and 2005 were comprised of the following:
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Twelve Months Ended December 31, | ||||
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2007 |
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2006 |
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2005 |
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Residential |
33.8% |
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34.2% |
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33.3% |
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Commercial |
51.9% |
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51.8% |
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47.7% |
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Industrial |
5.4% |
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5.5% |
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5.6% |
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Public authorities (including the UW) |
8.0% |
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8.4% |
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7.4% |
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Other utilities and other |
0.9% |
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0.1% |
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6.0% |
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Total |
100.0% |
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100.0% |
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100.0% |
Electric operations accounted for approximately 62.8%, 63.3%, and 60.8% of MGE's total 2007, 2006, and 2005 regulated revenues, respectively.
See Item 2, Properties, for a description of MGE's electric utility plant.
MGE has chosen to join the MRO as its regional reliability council. The essential purposes of the MRO are: (1) the development and implementation of regional and NERC reliability standards, and (2) determining compliance with those standards, including enforcement mechanisms. The MRO also provides other services consistent with its reliability charter.
Transmission
Reliability 2000 legislation enacted in Wisconsin mandated, among other things, the creation of a statewide transmission company to own the investor-owned utilities' transmission assets. Pursuant to these provisions, effective January 1, 2001, MGE transferred all of its electric utility transmission assets to ATC in exchange for an ownership interest in ATC. At December 31, 2007, MGE Transco held a 3.6% ownership interest in ATC as a result of the aforementioned assets transferred and subsequent additional capital contributions made.
ATC is owned by the utilities that contributed facilities or capital in accordance with Wisconsin law. ATC's purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of the Midwest ISO. MGE is however a non-transmission owning member of the Midwest ISO.
Regional Transmission Organizations
On February 1, 2002, MGE started taking network transmission service from the Midwest ISO. Midwest ISO is a nonprofit RTO approved by FERC. The Midwest ISO is responsible for monitoring the electric transmission system that delivers power from generating plants to wholesale power transmitters. Its role is to ensure equal access to the transmission system and to maintain or improve electric system reliability in the Midwest.
As a FERC approved RTO, Midwest ISO is required to provide a real-time market-based mechanism for congestion management. On April 1, 2005, Midwest ISO implemented its bid-based energy market. At that time, MGE began offering substantially all of its generation on the Midwest ISO market and purchasing much of its load requirement from the Midwest ISO market in accordance with the Midwest ISO Tariff.
Additionally, on May 1, 2004, MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent party that coordinates and directs the operation of the region's transmission grid, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. MGE has two purchase power agreements, for a total of 65 MW, that are impacted by this market.
Fuel supply and generation
MGE satisfies its customers' electric demand with purchased power and internal generation. During the years ended December 31, 2007, 2006, and 2005, MGE's electric energy delivery requirements were satisfied by the following sources:
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Twelve Months Ended December 31, | ||||
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2007 |
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2006 |
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2005 |
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Coal |
51.3% |
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48.7% |
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52.0% |
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Natural gas |
8.2% |
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6.8% |
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10.0% |
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Fuel oil |
0.1% |
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0.1% |
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0.1% |
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Renewable sources |
0.8% |
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0.7% |
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1.2% |
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Purchased power |
39.6% |
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43.7% |
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36.7% |
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Total |
100.0% |
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100.0% |
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100.0% |
Sources used depend on market prices, generating unit availability, weather, and customer demand.
Coal
MGE and two other utilities jointly own Columbia, a coal-fired generating facility, which accounts for 29% (225 MW) of MGE's net generating capability. Power from this facility is shared in proportion to each owner's ownership interest. MGE has a 22% ownership interest in Columbia. The other owners are Alliant, which operates Columbia, and WPSC. The Columbia units burn low-sulfur coal obtained (pursuant to long-term contracts) from the Powder River Basin coal fields located in Wyoming and Montana.
MGE's share of the coal inventory supply for the units increased from 31 days on December 31, 2006, to 33 days on December 31, 2007. The co-owners' current goal is to maintain approximately a 35 day inventory.
MGE also owns the Blount Generating Facility located in Madison, Wisconsin, which is fueled by coal, gas, and other alternative renewable sources. On January 19, 2006, MGE announced a plan, subject to certain conditions, that includes discontinuing coal use at the end of 2011 at Blount. The plant will continue to run on natural gas but will be reduced from its current approximate 190 MW capacity to 100 MW when coal burning is discontinued.
Natural gas and oil
MGE owns gas fired combustion turbines. These turbines are primarily located in Madison and Marinette, Wisconsin and have a total of 174 MW of generating capacity.
See discussion above for discussion of the Blount Generating Facility and see below discussion under Nonregulated Operations for MGE's interest in a natural gas-fired cogeneration facility on the UW campus.
Renewable generation sources
On September 29, 2006, MGE formalized plans to acquire 29.7 MW or 18 turbines in a wind-powered electric generating facility to be constructed in Worth County, Iowa. This project is expected to be completed in the first quarter of 2008. At December 31, 2007, MGE had incurred $55.9 million (excluding AFUDC) of costs on the project, which is reflected in the Construction Work in Progress balance on MGE and MGE Energy's consolidated balance sheets. Additionally, MGE had recorded a total of $2.4 million in AFUDC-debt and equity which is also reflected in Construction Work in Progress at December 31, 2007. MGE will begin recovering the cost of this project in rates in 2008.
Purchased power
As mentioned under the discussion on "Regional Transmission Organizations" above, at the time Midwest ISO implemented its bid-based energy market, MGE began offering substantially all of its generation on the Midwest ISO market and purchasing much of its load requirement from the Midwest ISO market in accordance with the Midwest ISO Tariff. Accordingly, the Midwest ISO market is the source of MGE's purchased power needs.
MGE also has purchase power contracts with two companies located in the PJM market. These agreements provide a means for MGE to participate in the PJM market via the receipt of FTRs. Under these agreements MGE has the contractual right to 65 MW of power.
On September 21, 2007, MGE entered into a ten-year purchase power agreement which provides MGE with firm capacity, energy, and a pro-rata share of the counterparty's rights to renewable attributes beginning on June 1, 2012, and ending on May 31, 2022 (the "base term"). This agreement obligates MGE to purchase a minimum of 50 MW of capacity each year and a fixed amount of energy. Pursuant to the terms of this agreement, MGE has the option to extend the ten year term and/or purchase additional energy and capacity during the base term. MGE has not exercised either of these options at this time.
On April 23, 2007, MGE entered into a 20-year purchase power agreement for wind generation. Under this agreement, MGE has agreed to purchase 30 MW of wind power from the Top of Iowa II project which is being constructed in Iowa. This facility became operational in January 2008. MGE does not have any capacity payment commitments under this agreement. However, MGE is obligated to purchase its ratable share of the energy produced by the project.
On February 21, 2007, MGE and Invenergy signed an amendment to an existing purchase power agreement. Under this amended agreement, MGE has agreed to purchase for a 20-year term approximately 15 MW of wind power at a facility to be constructed near Brownsville, Wisconsin. Construction of this facility began in June 2007 and the facility is expected to be operational in early 2008. MGE does not have any capacity payment commitments under this agreement. However, MGE is obligated to purchase its ratable share of the energy produced by the unit.
Gas Utility Operations
MGE transports and distributes natural gas in a service area covering 1,625 square miles in seven south-central Wisconsin counties. Its service area includes the city of Madison, Wisconsin.
On December 31, 2007, MGE supplied natural gas service to nearly 140,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of 45 townships. Of the total number of customers, approximately 89% were residential and 11% were commercial or industrial. Gas revenues for 2007, 2006, and 2005 were comprised of the following:
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Twelve Months Ended December 31, | ||||
|
|
2007 |
|
2006 |
|
2005 |
|
Residential |
55.6% |
|
55.0% |
|
55.6% |
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Commercial |
38.3% |
|
38.3% |
|
39.1% |
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Industrial |
4.0% |
|
3.6% |
|
2.3% |
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Transportation service and other |
2.1% |
|
3.1% |
|
3.0% |
|
Total |
100.0% |
|
100.0% |
|
100.0% |
Gas operations accounted for approximately 37.2%, 36.7%, and 39.2% of MGE's total 2007, 2006, and 2005 regulated revenues, respectively.
MGE can curtail gas deliveries to its interruptible customers. Approximately 7% of gas deliveries in 2007 and 8% of gas sold in 2006 were to interruptible customers.
Gas supply
MGE has physical interconnections with ANR and NNG. MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at one NNG and four ANR gate stations. MGE also receives deliveries at NNG gate stations located in Elroy, Prairie du Chien, Viroqua, and Crawford County. Interconnections with two major pipelines provide competition in interstate pipeline service and a more reliable and economical gas supply mix, which includes gas from Canada and from the mid-continent and Gulf/offshore regions in the United States.
During the winter months, when customer demand is high, MGE is primarily concerned with meeting its obligation to firm customers. MGE meets customer demand by using firm supplies under contracts finalized before the heating season, supplies in storage (injected during the summer), and other firm supplies purchased during the winter period.
By contract, a total of 5,430,964 Dth can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations.
MGE's contracts for firm transportation service include winter maximum daily quantities of:
•
161,150 Dth (including 96,078 Dth of storage withdrawals) on ANR.
•
59,608 Dth on NNG.
Nonregulated Energy Operations
MGE Energy, through its subsidiaries, seeks to develop generation sources that will assist MGE in meeting the electricity needs of its customers. Decisions on the type of energy source and its size, timing, ownership, and financing depend upon a number of factors including the growth of customer demand in MGE's service area and surrounding areas, the effectiveness of customer demand management efforts, the costs and availability of alternative power sources, the availability of transmission capacity, issues associated with siting power generation sources, available financing and ownership structures, regulatory treatment and recovery, construction lead times and risks, and other factors. The decisions tend to involve long-time horizons due to the lead time involved in siting and constructing new generation sources and the associated transmission infrastructure.
WCCF
MGE Power West Campus and the UW jointly own undivided interests in a natural gas-fired cogeneration facility on the UW campus. The facility has the capacity to produce 20,000 tons of chilled water, 500,000 pounds per hour of steam, and approximately 150 MW of electricity. The UW owns 45% of the facility, which represents its interest in the chilled-water and steam assets. These assets are used to meet the UW's growing need for air-conditioning and steam-heat capacity. MGE Power West Campus owns 55% of the facility, which represents its interest in the electric generating assets. These assets are used to provide electricity to MGE's customers. The UW's share of the plant and portion of the earnings from the WCCF are not reflected in the consolidated financial statements of MGE or MGE Energy. MGE Power West Campus' share of the cost of this project is reflected in Property, Plant, and Equipment on MGE and MGE Energy's consolidated balance sheets
MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the entire facility. On April 26, 2005, the facility lease between MGE and MGE Power West Campus commenced. The financial terms of the facility lease include a capital structure of 53% equity and 47% long-term debt, return on equity of 12.1%, and a lease term of 30 years. At the end of the lease term in 2035, MGE may, at its option, renew the facility lease for an additional term, purchase the generating facility at fair market value or allow the lease contract to end. Under the Joint Ownership Agreement for WCCF, the State has an option to acquire at the higher of book or market cost, a 45 MW interest in WCCF or enter into a purchase power agreement for 45 MWs of capacity.
Elm Road
On November 4, 2005, MGE Power Elm Road closed on the exercise of an option to acquire an undivided 8.33% ownership interest in each of two 615 MW advanced technology, coal-fired generating units being constructed by We Energies in Oak Creek, Wisconsin. MGE Power Elm Road's estimated share of capital costs for its 8.33% ownership interest in both units is approximately $171 million (excluding capitalized interest) which it intends to finance primarily through funds received from MGE Energy. MGE Energy expects that these funds will be raised through the sale of common stock (via the Stock Plan), short-term debt, and operating cash flows. At December 31, 2007, MGE Power Elm Road had incurred $103.7 million (excluding capitalized interest) of costs on the project, which is reflected in the Construction Work In Progress balance on MGE and MGE Energy's consolidated balance sheets.
On the date of acquisition, MGE Energy and its subsidiaries entered into various agreements, including a facility lease agreement. This facility lease agreement is between MGE Power Elm Road (a nonregulated subsidiary of MGE Energy) and MGE. The financial terms of the facility lease include a capital structure of 55% equity and 45% long-term debt, and return on equity of 12.7%, a lease term of 30 years, and a 5% rent reduction in the first five years.
On November 1, 2005, MGE received approval from the PSCW to defer payments made to MGE Power Elm Road for carrying costs during construction of the facility, management fees, and community impact mitigation costs. MGE began collecting the carrying costs in rates in 2006. MGE estimates total carrying costs to be approximately $53.6 million. Of these costs, $21.1 million is estimated to relate to the capitalized interest and the debt portion of the facility. These costs will be recognized over the period in which the facility will be depreciated. The remaining $32.5 million is estimated to represent the equity portion and is being recognized over the period recovered in rates.
Environmental
MGE is subject to local, state, and federal regulations concerning air quality, water quality, and solid waste disposal. The EPA administers certain federal statutes relating to such matters. The DNR administers certain state statutes as to such matters and has primary jurisdiction over standards relating to air and water quality and solid and hazardous waste. Those regulations affect the manner in which MGE conducts its operations, the costs of those operations, as well as some capital and operating expenditures. It can also affect the siting, timing, and cost of new projects or other significant actions affecting the environment. MGE is not able to predict the direction of future regulations or if compliance with any such regulations will involve additional expenditures for pollution control equipment, plant modifications, or curtailment of operations. Such actions could reduce capacity or efficiency at existing plants or delay the construction and operation of future generating facilities.
Air quality
Air quality regulations promulgated by the EPA and DNR in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO2) nitrogen oxides (NOx) and other pollutants and require permits for operation of emission sources. These permits have been obtained by MGE and must be renewed periodically. Various initiatives, including the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), maximum achievable control technology (MACT) standards, new source performance standards (NSPS) and Regional Haze Regulations, as well as existing and proposed state mercury emissions limits, may result in additional operating and capital expenditure costs.
The CAIR requires NOx and SO2 emission reductions in two phases and includes a regional cap-and-trade system. The first phase begins in 2009 for NOx and 2010 for SO2, and contemplates reductions of 55% and 40%, respectively, increasing in the second phase by 2015 to 65% and 70%, respectively; in each case over 2003 levels. MGE owns several generation units currently subject to CAIR: Blount Generating Station, Columbia, M34 (West Marinette) and Fitchburg Substation. In future generation years, Elm Road will be and WCCF may be affected by CAIR. MGE anticipates that it may need to purchase NOx and SO2 allowances and /or install equipment at Columbia to meet CAIR allocations for its generation fleet. The exact cost of the allowances and/or equipment installation is not known at this time.
CAMR seeks to reduce mercury emissions from coal-fired power plants through a system of monitoring and several compliance options, including equipment installations and allowance trading options through a cap-and-trade system, which are scheduled to commence in 2009; although there is some uncertainty in light of a February 8, 2008 U.S. Court of Appeals decision invalidating the rule's cap-and-trade provisions. In March 2007, the DNR proposed state mercury rules under NR 446 to address its requirements under CAMR. The state's proposed rule is significantly different from the federal CAMR. If the state's version of CAMR as currently proposed becomes a rule, it will increase CAMR compliance costs for Columbia, Blount and Elm Road (those facilities currently subject to CAMR) because it is more restrictive in scope than the federal CAMR. However, it is unknown at this time what those additional costs would be. The Wisconsin DNR has announced that it intends to introduce a revised proposed rule some time in 2008. Thus, the economic and operational effect on MGE is not known at this time.
Air modeling indicates that emissions from Columbia may impair visibility at certain Class I Scenic Areas and may therefore be subject to Regional Haze and Best Available Retrofit Technology (BART) regulations. DNR expects to submit rules on BART and/or Regional Haze to EPA in 2008 with BART becoming effective in 2013. The State of Minnesota has also asserted that Wisconsin emission sources significantly contribute to visibility impairment at the Boundary Water Canoe Wilderness Area and Voyageurs National Park. Minnesota has asked Wisconsin to evaluate reducing the Wisconsin statewide average SO2 and NOx emission rates for electric generating units to approximately 0.25 lbs/MMBtu by 2018. If adopted, these rates could affect capital, operational and maintenance expenses at MGE's generating facilities.
In 1998, the EPA issued a rule that imposed a NOx emission budget for emission sources in Wisconsin. In 2000, the Court of Appeals for the District of Columbia invalidated a portion of the rule as applied to Wisconsin; however, the Court stayed that portion of the challenge concerning Wisconsin's alleged impacts on downwind, eight-hour ozone nonattainment areas. EPA has also stayed that portion of the rule concerning Wisconsin's alleged impacts on downwind eight-hour ozone nonattainment areas. If that portion of the rule concerning eight-hour ozone nonattainment areas is upheld, the resulting NOx emission budget for Wisconsin could potentially affect the level of permissible NOx emissions from Blount, Columbia, and WCCF.
The EPA recently lowered the acceptable 24-hour National Ambient Air Quality Standards (NAAQS) for fine particulate matter, i.e., particles that are 2.5 microns or smaller in diameter and states must monitor and collect data on fine particulate levels in order to establish attainment and nonattainment areas for the new standard. States (including Wisconsin) determine designation by county and/or area based on whether the county/area meets the NAAQS (designated as attainment) or the county does not meet the NAAQS (designated as nonattainment), as measured by air monitors placed in that county/area. In mid-December 2007, Wisconsin recommended that the EPA designate all areas in the state as attainment. However, EPA will finalize designations (attainment or nonattainment) in 2009. Updated air monitoring results may play a role in EPA's designation decision. Designations of nonattainment and implementation of the fine particulate NAAQS could affect capital, operational and maintenance expenses at generating facilities.
Compliance with these and other related environmental initiatives is expected to result in significant additional operating and capital expenditures at Columbia. The Columbia operator's current estimates show that MGE's share of the capital expenditures required to comply with these environmental initiatives will be between $130 million and $200 million. According to current estimates, compliance with these initiatives is also expected to result in an increase to MGE's pro-rata share of Columbia's on-going operating expenses. The operator and MGE management are continuing to explore various alternatives to comply with these standards. Accordingly, actual capital expenditures may fall above or below the range provided. These standards and initiatives may also result in additional capital and operating expenditures at MGE's other generating facilities. MGE expects that the costs to comply with these standards will be fully recoverable through rates. Pursuant to an order issued by the PSCW on September 14, 2007, MGE is permitted to defer pre-certification and pre-construction costs related to compliance with CAIR and CAMR regulations at Columbia. Additionally, MGE is entitled to 100% AFUDC on the related pre-construction costs.
Water quality
MGE is subject to water quality regulations issued by the DNR. These regulations include categorical-effluent discharge standards, which require the use of effluent-treatment processes equivalent to categorical "best practicable" or "best available" technologies under compliance schedules established under the Federal Water Pollution Control Act. The DNR has published categorical regulations for chemical and thermal discharges from electric-steam generating plants. The regulations limit discharges from MGE's plants into Lake Monona and other Wisconsin waters. The DNR has also proposed rules regarding thermal discharge which are subject to comment and further modification. Depending on the terms of the final rules, MGE may be required to make significant additional capital expenditures but are expected to be recoverable in rates.
In 2004, the EPA promulgated final rules under Section 316(b) of the Clean Water Act addressing cooling water intake structures for existing large power plants (Phase II rule). A challenge to this rule was upheld in a January 2007 court decision and significant parts of the rule were remanded to the EPA for further consideration. In July 2007, EPA suspended the Phase II rule in its entirety and directed states to use their "best professional judgment" in evaluating intake systems. The ruling, and EPA's actions in response, which may change the compliance requirements, may affect the timing and costs associated with MGE's WPDES permit for Blount and possibly the WPDES permit for the Oak Creek/Elm Road facility. At this time, MGE is unable to determine the timing or amount of that impact.
The WPDES permit for the Oak Creek/Elm Road facility has been contested. On November 29, 2007, an Administrative Law Judge (the "ALJ") determined that the two additional coal units that are part of the Oak Creek expansion are "new facilities" under Section 316(b) of the Federal Clean Water Act and therefore are subject to the standards promulgated by EPA for new facilities in the so-called Phase I rule. Unlike the Phase II rule for existing facilities previously discussed, the Phase I rules for new facilities largely withstood judicial review and are valid. The ALJ did not vacate the WPDES permit or any other permit necessary to continue construction of the two additional coal units, pointing out that, based upon the present record, the water intake currently under construction as part of the Oak Creek expansion may be permittable under the standards that apply to new facilities.
The ALJ remanded the WPDES permit to the WDNR with a direction that it reissue or modify the permit to reflect "best technology available" to comply with the standards applicable to new facilities under Wisconsin state law. As part of the decision, the ALJ restated his prior opinion that the water intake system currently under construction may not be operated so long as it remains a contested matter regarding the WPDES permit. The ALJ's ruling has been appealed to circuit court.
The Operator has advised us that there are alternatives under the EPA's rule for new facilities that would permit the use of the once-through cooling system rather than the use of cooling towers. The Operator has requested the WDNR to issue a modified permit and has submitted additional information to the WDNR supporting the request for approval of the once-through cooling system under this rule. The Operator anticipates the WDNR will complete the WPDES permit modifications process in the first half of 2008. At this time, we cannot predict with certainty what the WDNR's decision will be. A reissued permit would be subject to public comment and possible administrative and legal review.
While the process for modifying the WPDES permit proceeds, construction of the additional coal units will continue on the current schedule.
Solid waste
MGE is listed as a potentially responsible party for a site the EPA has placed on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing and processing waste oil for several years. This site requires clean up under the Comprehensive Environmental Response, Compensation and Liability Act. A group of companies, including MGE, is currently working on cleaning up the site. Management believes that its share of the final cleanup costs for the Lenz Oil site will not result in any materially adverse effects on MGE's operations, cash flows, or financial position. Insurance may cover a portion of the cleanup costs. Management believes that the cleanup costs not covered by insurance will be recovered in current and future rates. As of December 31, 2007, a $0.1 million gross liability was accrued for this matter.
Global climate change
The United States is currently not a party to the United Nations' Kyoto Protocol that became effective for signatories on February 16, 2005. The Protocol process generally requires developed countries to cap greenhouse gas (GHG) emissions at certain levels during the 2008 to 2012 time period. Although GHG is not currently regulated in the United States, MGE recognizes that these gases—particularly carbon dioxide (CO2), which is released in the burning of fossil fuels—may face future legislative or regulatory restrictions. Environmental-related legislation is regularly introduced in Congress and in the Wisconsin legislature. Such legislation typically includes various compliance dates and compliance limits. There are several proposed versions of legislation pending in Congress and in the Wisconsin legislature to address global climate changes, including efforts to reduce and control and/or tax the emission of greenhouse gases, such as carbon dioxide, created in the combustion of fossil fuels, including coal, natural gas, and oil. Bills are also considering releases associated with natural gas pipelines and company fleets. In addition, there could be national and state mandates to produce increasing percentages of electricity from renewable forms of energy, such as wind. Such legislation could have the potential for a significant financial impact on MGE, including the cost to install new emission control equipment, purchase allowances, or do fuel switching. However, the financial consequences of this compliance cannot be determined until final legislation is passed. MGE management would expect to seek and receive recovery of such compliance measures through rate increases, yet the probability and specific impact of such legislation cannot be reasonably estimated at this time. MGE will continue to monitor proposed legislation.
Employees
As of December 31, 2007, MGE had 724 employees. MGE employs 247 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 102 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. Both of these collective bargaining agreements expire on April 30, 2009. There are also five employees covered by a collective bargaining agreement with Local Union No. 2-111 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union. This collective bargaining agreement expires on November 1, 2009.
Financial Information About Segments
See Footnote 24 of the Notes to Consolidated Financial Statements for financial information relating to MGE Energy's and MGE's business segments.
Executive Officers of the Registrants
|
Executive |
Title |
Effective Date |
Service Years as an Officer |
|
Gary J. Wolter(a) Age: 53 |
Chairman of the Board, President and Chief Executive Officer |
02/01/2002 |
18 |
|
Lynn K. Hobbie(b) Age: 49 |
Senior Vice President |
02/01/2000 |
12 |
|
James G. Bidlingmaier(b) Age: 61 |
Vice President - Admin. and Chief Information Officer |
02/01/2000 |
8 |
|
Kristine A. Euclide(b) Age: 55 |
Vice President and General Counsel |
11/15/2001 |
6 |
|
Terry A. Hanson(a) Age: 56 |
Vice President, Chief Financial Officer and Secretary |
10/01/2001 |
16 |
|
Scott A. Neitzel(b) Age: 47 |
Vice President - Energy Supply Vice President- Energy Supply Policy |
09/01/2006 07/01/2002 |
10 |
|
Jeffrey C. Newman(a) Age: 45 |
Vice President and Treasurer |
01/01/2001 |
10 |
|
Peter J. Waldron(b) Age: 50 |
Vice President and Operations Officer Vice President - Energy Supply Operations |
09/01/2006 07/01/2002 |
11 |
Note: Ages, years of service, and positions as of December 31, 2007.
(a)
Executive officer of MGE Energy and MGE
(b)
Executive officer of MGE
Item 1A. Risk Factors.
MGE Energy and its subsidiaries, including MGE, operate in a market environment that involves significant risks, many of which are beyond their control. The following risk factors may adversely affect their results of operations, cash flows and market price for their publicly traded securities. While MGE Energy and MGE believe they have identified and discussed below the key risk factors affecting their business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect their performance or financial condition in the future.
Regulatory Risk
We are subject to extensive government regulation in our business, which affects our costs and responsiveness to changing events and circumstances.
Our business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding company by the PSCW. MGE is regulated by the PSCW as to its rates, terms and conditions of service; various business practices and transactions; financing; and transactions between it and its affiliates, including MGE Energy. MGE is also subject to regulation by the FERC, which regulates certain aspects of its business. The regulations adopted by the State and Federal agencies affect the manner in which we do business, our ability to undertake specified actions since pre-approval or authorization may be required, the costs of operations, and the level of rates charged to recover such costs. Our ability to attract capital is also dependent in part, upon our ability to obtain a fair return from the PSCW.
We face risk for the recovery of fuel and purchased power costs when they exceed the base rate established in MGE's current rate structure.
MGE burns natural gas in several of its peak electric generation facilities, and in many cases, the cost of purchased power is tied to the cost of natural gas. MGE bears significant regulatory risk for the recovery from customers of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure.
We are subject to environmental laws and regulations that affect our costs and business plans.
Our subsidiaries are subject to environmental laws and regulations that affect the manner in which they conduct business, including capital expenditures, operating costs and potential liabilities. Changes and developments in these laws and regulations may change or limit our business plans, make them more costly to implement, or expose us to liabilities for past or current operations.
Numerous environmental regulations govern many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste; and continue to evolve in response to real or perceived concerns, regulatory initiatives, non-governmental organizational initiatives and private parties and legal process. The development of these regulations can introduce uncertainty into the planning and implementation process for long-lead time projects, such as generating stations, and can introduce costly delays if previous decisions need to be revisited as a result of judicial mandate or regulatory change. These regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections, and other approvals, and can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These effects can be seen not only with respect to new construction, such as our participation in the Elm Road generating units, but could also require the addition of additional control equipment or the implementation of other compliance measures.
In addition, we may be a responsible party for environmental clean up at sites identified as containing hazardous materials. It is difficult to predict the costs potentially associated with a site clean-up due to the potential joint and several liability for all potentially responsible parties, the nature of the clean-up required and the availability of recovery from other potentially responsible parties.
We may incur material costs of compliance if federal and/or state legislation is adopted to address climate change.
Various persons, including legislators, regulators and private parties, have increasingly expressed concern about the effects of global warming and the effects of greenhouse gases (GHG). These concerns have prompted federal and state legislation that would regulate or cap such emissions to be actively discussed. There are several proposed versions of legislation pending in the U.S. Congress and in the Wisconsin legislature to address global climate changes, including efforts to reduce and control and/or tax the emission of GHG, such as carbon dioxide, created in the combustion of fossil fuels, including coal, natural gas, and oil. Bills are also considering releases associated with natural gas pipelines and company fleets. These legislative initiatives are sometime paired with efforts to mandate increasing percentages of electricity from renewable forms of energy, such as wind, or to reduce the demand for electricity. Such legislation could have the potential for a significant financial impact on MGE, including the cost to install new emission control equipment, purchase allowances, or do fuel switching. However, the financial consequences of this compliance cannot be determined until final legislation is passed.
Our business may be negatively affected by the restructuring of the energy industry.
MGE is a member of the Midwest ISO, a FERC-approved RTO. Effective April 1, 2005, Midwest ISO implemented its bid-based energy market. MGE cannot predict the impact the new market may ultimately have on its electric operations. Also, the ability of Midwest ISO to maintain its members is an important factor in the success of its operations.
Operating Risk
We are affected by weather, which affects customer demand and can affect the operation of our facilities.
The demand for electricity and gas is affected by weather. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity for cooling and heating, respectively, as opposed to the softening effect of more moderate temperatures. Our electric revenues are sensitive to the summer cooling season and, to a lesser extent, the winter heating season. Similarly, very cold temperatures can dramatically increase the demand for gas for heating. A significant portion of our gas system demand is driven by heating. Extreme summer conditions or storms may stress electric transmission and distribution systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.
We are affected by economic activity within our service area.
Higher levels of development and business activity generally increase the numbers of customers and their use of electricity and gas. Likewise, periods of recessionary economic conditions generally adversely affect our results of operations.
Our ability to manage our purchased power costs is influenced by a number of uncontrollable factors.
We are exposed to additional purchased power costs to the extent that our power needs cannot be fully covered by the supplies available from our existing facilities and contractual arrangements. Those needs, and our costs, could be affected by:
•
Increased demand due to, for example, weather, customer growth, or customer obligations,
•
The inability to transmit our contracted power from its generation source to our customers due to transmission line constraints, outages, or equipment failures,
•
Reductions in the availability of power from our owned or contracted generation sources due to equipment failures, shortages of fuel or environmental limitations on operations, and
•
Failure to perform on the part of any party from which we purchase capacity or energy.
An unexpected change in demand or the availability of generation or transmission facilities can expose us to increased costs of sourcing electricity in the short-term market where pricing may be more volatile.
Our financial performance depends on the equipment and facilities in our distribution system being operational.
Weather conditions, accidents, catastrophic events, and failures of equipment or facilities can disrupt or limit our ability to deliver electricity and gas. Efforts to repair or replace equipment and facilities may not be successful, or we may be unable to make the necessary improvements to our distribution system, causing service interruptions. The resulting interruption of services could result in lost revenues and additional costs.
We face construction risk in connection with the completion of generating units.
We have assumed risks under the agreements related to our ownership interest in two 615 MW coal-fired generating units being constructed in Oak Creek, Wisconsin. The completion of this project is subject to construction risks over which we will have limited or no control and which might adversely affect project costs and completion time. These risks include shortages of, the inability to obtain, or the cost of, labor or materials; the inability of the general contractor or subcontractors to perform under their contracts; strikes; adverse weather conditions; the inability to obtain necessary permits in a timely manner, legal challenges and appeals to granted permits, including the WPDES permit, and changes in applicable laws or regulations; governmental actions; and events in the global economy. In addition, in the case of the units being constructed in Oak Creek, if the units' final construction costs exceed the fixed costs allowed in the PSCW order, this excess will not be recoverable from MGE or its customers unless specifically allowed by the PSCW. Any Oak Creek project costs above the authorized amount, but below a 5% cap, will be subject to a prudence determination made by the PSCW.
Financial Risk
We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal and oil.
We face commodity price risk exposure with respect to our purchases of natural gas, electricity, coal and oil, SO2 allowances and risk through our use of derivatives, such as futures, forwards and swaps, to manage that commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.
We are exposed to interest rate risk.
We are exposed to interest rate risk on our variable rate financing. MGE Energy had $103.5 million of variable-rate debt outstanding at December 31, 2007, including $61.0 million for MGE. Borrowing levels under commercial paper arrangements vary from period to period depending upon capital investments and other factors. Such interest rate risk means that we are exposed to increased financing costs and associated cash payments as a result of changes in the short-term interest rates.
Market performance affects our employee benefit plan asset values.
The performance of the capital markets affects the values of the assets that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of those assets may increase our current and longer-term funding requirements for these obligations.
We are exposed to credit risk primarily through our regulated energy business.
Credit risk is the loss that may result from counterparty nonperformance. We face credit risk primarily through MGE's regulated energy business. Failure of contractual counterparties to perform their obligations under purchase power agreements, commodity supply arrangements or other agreements may result in increased expenses for MGE as a result of being forced to cover the shortfall in the spot or short-term market, where prices may be more volatile.
As a holding company, we are dependent on upstream cash flows from our subsidiaries for the payment of dividends on our common stock.
As a holding company, we have no operations of our own, our ability to pay dividends on our common stock is dependent on the earnings and cash flows of our operating subsidiaries and their ability to pay upstream dividends or to repay funds to us. Prior to funding us, our subsidiaries have financial obligations that must be satisfied, including among others, debt service and obligations to trade creditors, and are subject to contractual and regulatory restrictions on the payment of dividends.
Disruptions in the financial markets as a result of the effects of sub-prime financing and related matters may affect our ability to finance at a reasonable cost and in accordance with our planned schedule.
The credit markets have experienced some disruption and uncertainty as a result of the developments associated with sub-prime mortgage issues. To the extent that such issues affect the ability or willingness of credit providers or investors to participate in the credit markets or particular types of investments, or affect their perception of the risk associated with particular types of investments, our cost of borrowing could be affected.
Item 1B. Unresolved Staff Comments.
MGE Energy and MGE
None.
Item 2. Properties.
Electric Generation
Net generating capability in service at December 31, 2007, was as follows:
|
Plants |
|
Location |
|
Commercial Operation Date |
|
Fuel |
|
Net Capability (MW) |
|
No. of Units |
|
Steam plants: |
|
|
|
|
|
|
|
|
|
|
|
Columbia |
|
Portage, WI |
|
1975 & 1978 |
|
Low-sulfur coal |
|
225(1,2) |
|
2 |
|
Blount |
|
Madison, WI |
|
1957 & 1961 |
|
Coal/gas |
|
97(3) |
|
2 |
|
|
|
|
|
1938 & 1943 |
|
Gas |
|
39 |
|
2 |
|
|
|
|
|
1949 |
|
Coal/gas |
|
22(3) |
|
1 |
|
|
|
|
|
1964-1968 |
|
Gas/oil |
|
28 |
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
WCCF |
|
Madison, WI |
|
2005 |
|
Gas/oil |
|
149(4,5) |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combustion turbines |
|
Madison, WI Marinette, WI |
|
1964-2000 |
|
Gas/oil |
|
174 |
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Portable generators |
|
Madison, WI |
|
1998-2001 |
|
Diesel |
|
44 |
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wind turbines |
|
Townships of Lincoln and Red River, WI |
|
1999 |
|
Wind |
|
2 |
|
17 |
|
Total |
780 |
|
| |||||||
(1)
Baseload generation.
(2)
MGE's 22% share of two 512-MW units. The other owners are Alliant, which operates Columbia, and WPSC.
(3)
On January 19, 2006, MGE announced that it would cease coal-fired generation at Blount in 2011, subject to certain conditions, including regulatory approvals.
(4)
Facility is jointly owned. MGE Power West Campus owns a controlling interest in the electric generation plant and the UW owns a controlling interest in the chilled-water and steam plants. MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the facility. Amounts shown represent MGE's share of the net capability.
(5)
Based on the terms of the joint plant agreement between MGE and the UW, the UW has the ability to reduce net capability of these units by approximately 27 MW in the winter and approximately 17 MW in the summer.
Electric and Gas Distribution Facilities
Major electric distribution lines and substations in service at December 31, 2007, which are owned by MGE, are as follows:
|
|
|
Miles | ||
|
Distribution lines: |
|
Overhead |
|
Underground |
|
13.8 kV and under |
|
925 |
|
1,056 |
|
|
|
|
|
|
|
Distribution: |
|
Substations |
|
Installed Capacity (kVA) |
|
69-13.8 kV |
|
26 |
|
949,000 |
|
13.8-4 kV |
|
31 |
|
285,967 |
Gas facilities include 2,398 miles of distribution mains, which are owned by MGE.
A significant portion of MGE's electric and gas distribution facilities is located above or underneath highways, streets, other public places or property that others own. MGE believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements and licenses; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.
Transmission Facilities
As required by Wisconsin law, MGE and other Wisconsin electric utilities transferred their electric transmission assets to ATC on January 1, 2001. MGE received an ownership interest in ATC in exchange for its transmission plant and related deferred taxes and deferred investment tax credits. That interest is presently held by MGE Transco. MGE receives a return on its investment in ATC that is approximately equal to the return it would have earned by retaining its transmission facilities.
Item 3. Legal Proceedings.
MGE Energy and MGE
MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that are handled and defended in the ordinary course of business. While MGE Energy and MGE are unable to predict the outcome of these matters, management does not believe, based upon currently available facts, that the ultimate resolution of any of such proceedings would have a material adverse effect on their overall financial condition or results of operations.
Also see "Environmental" under Item 1, Business, for a description of several environmental proceedings involving MGE.
Item 4. Submission of Matters to a Vote of Security Holders.
MGE Energy and MGE
None.
PART II.
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market for Common Equity
MGE Energy
MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On February 1, 2008, there were approximately 18,480 shareholders of record. The following table shows high and low sale prices for the common stock on Nasdaq for each quarter over the past two years.
|
|
Common stock price range | ||
|
|
High |
|
Low |
|
2007 |
|
|
|
|
Fourth quarter |
$37.24 |
|
$32.06 |
|
Third quarter |
$35.50 |
|
$29.40 |
|
Second quarter |
$37.02 |
|
$31.46 |
|
First quarter |
$36.82 |
|
$33.05 |
|
|
|
|
|
|
2006 |
|
|
|
|
Fourth quarter |
$37.00 |
|
$32.17 |
|
Third quarter |
$34.09 |
|
$29.23 |
|
Second quarter |
$33.33 |
|
$29.20 |
|
First quarter |
$35.18 |
|
$30.39 |
MGE
As of February 1, 2008, there were 17,347,889 outstanding shares of common stock, all of which were held by MGE Energy. There is no market for shares of common stock of MGE.
Dividends
MGE Energy
The following table sets forth MGE Energy's quarterly cash dividends declared during 2007 and 2006:
|
|
2007 |
|
2006 | ||||||
|
(Per share) |
4th Qtr. |
3rd Qtr. |
2nd Qtr. |
1st Qtr. |
|
4th Qtr. |
3rd Qtr. |
2nd Qtr. |
1st Qtr. |
|
MGE Energy |
$0.355 |
$0.355 |
$0.348 |
$0.348 |
|
$0.348 |
$0.348 |
$0.345 |
$0.345 |
MGE
The following table sets forth MGE's quarterly cash dividends declared during 2007 and 2006:
|
|
2007 |
|
2006 | ||||||
|
(In thousands) |
4th Qtr. |
3rd Qtr. |
2nd Qtr. |
1st Qtr. |
|
4th Qtr. |
3rd Qtr. |
2nd Qtr. |
1st Qtr. |
|
MGE |
$2,500 |
$ - |
$6,560 |
$6,561 |
|
$ - |
$ - |
$6,499 |
$6,498 |
See "Liquidity and Capital Resources - Financing Activities" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a description of restrictions applicable to dividend payments by MGE.
Issuer Purchases of Equity Securities
MGE Energy and MGE
None.
Item 6. Selected Financial Data.
MGE Energy
(In thousands, except per-share amounts)
|
|
For the years ended December 31, | ||||||||
|
Summary of Operations |
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
Operating revenues: |
|
|
|
|
|
|
|
|
|
|
Regulated electric |
$334,488 |
|
$318,912 |
|
$310,984 |
|
$250,386 |
|
$241,745 |
|
Regulated gas |
197,925 |
|
185,226 |
|
200,533 |
|
171,763 |
|
159,802 |
|
Nonregulated |
5,181 |
|
3,408 |
|
1,853 |
|
2,732 |
|
1,023 |
|
Total |
537,594 |
|
507,546 |
|
513,370 |
|
424,881 |
|
402,570 |
|
Operating expenses |
438,156 |
|
413,150 |
|
439,629 |
|
350,213 |
|
330,124 |
|
Other general taxes |
15,771 |
|
15,402 |
|
13,269 |
|
12,715 |
|
11,592 |
|
Operating income |
83,667 |
|
78,994 |
|
60,472 |
|
61,953 |
|
60,854 |
|
Other income |
6,069 |
|
4,329 |
|
4,938 |
|
3,927 |
|
1,888 |
|
Interest expense, net |
(13,056) |
|
(15,001) |
|
(13,448) |
|
(11,384) |
|
(12,201) |
|
Income before taxes |
76,680 |
|
68,322 |
|
51,962 |
|
54,496 |
|
50,541 |
|
Income tax provision |
(27,855) |
|
(25,899) |
|
(19,871) |
|
(20,656) |
|
(19,901) |
|
Net income |
$ 48,825 |
|
$ 42,423 |
|
$ 32,091 |
|
$ 33,840 |
|
$ 30,640 |
|
Average shares outstanding |
21,520 |
|
20,564 |
|
20,436 |
|
19,119 |
|
17,894 |
|
Basic and diluted earnings per share |
$2.27 |
|
$2.06 |
|
$1.57 |
|
$1.77 |
|
$1.71 |
|
Dividends declared per share |
$1.41 |
|
$1.39 |
|
$1.37 |
|
$1.36 |
|
$1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
Electric |
$ 614,949 |
|
$547,150 |
|
$533,896 |
|
$466,897 |
|
$433,385 |
|
Gas |
234,002 |
|
228,639 |
|
233,139 |
|
205,738 |
|
185,382 |
|
Assets not allocated |
14,876 |
|
12,270 |
|
21,013 |
|
25,894 |
|
24,650 |
|
Nonregulated energy operations |
227,415 |
|
177,234 |
|
143,101 |
|
98,751 |
|
49,446 |
|
Transmission investments |
40,808 |
|
38,470 |
|
35,239 |
|
32,542 |
|
27,886 |
|
All others |
342,491 |
|
298,261 |
|
276,565 |
|
272,211 |
|
205,735 |
|
Eliminations |
(362,954) |
|
(319,792) |
|
(326,046) |
|
(273,262) |
|
(200,477) |
|
Total |
$1,111,587 |
|
$982,232 |
|
$916,907 |
|
$828,771 |
|
$726,007 |
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization including Short-Term Debt |
|
|
|
|
|
|
|
|
|
|
Common shareholders' equity |
$427,726 |
|
$375,348 |
|
$343,883 |
|
$338,197 |
|
$263,070 |
|
Long-term debt* |
262,346 |
|
252,284 |
|
222,312 |
|
202,257 |
|
222,204 |
|
Short-term debt |
103,500 |
|
57,000 |
|
82,500 |
|
53,275 |
|
31,680 |
|
Total Capitalization |
$793,572 |
|
$684,632 |
|
$648,695 |
|
$593,729 |
|
$516,954 |
*Includes current maturities.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
MGE Energy is a holding company operating through subsidiaries in five business segments: electric utility operations, gas utility operations, nonregulated energy operations, transmission investments, and all other. Our principal subsidiary is MGE, which conducts our electric utility and gas utility operations and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to nearly 136,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to nearly 140,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.
Our nonregulated energy operations have been formed to lease and own new electric generating capacity. Our nonregulated energy operations include the leasing of the cogeneration project on the UW-Madison campus. Our nonregulated energy operations also include an undivided 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin. Both of these operations are included in MGE's consolidated financial statements as a result of the accounting requirements of FIN 46R.
The transmission investment segment consists of our investment in ATC and the related equity earnings.
Our all other segment includes corporate operations and services, as well as certain construction services.
Our primary focus today and for the foreseeable future is our core utility customers at MGE. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE plans to meet this challenge by building more efficient generation projects and continuing its efforts to control its operational costs. We believe it is critical to continue maintaining a strong credit standing and financial strength in MGE as well as the parent company in order to accomplish these goals.
Results of Operations
Year Ended December 31, 2007, Versus the Year Ended December 31, 2006
Executive Summary - MGE Energy and MGE
In 2007, MGE Energy's earnings were $48.8 million or $2.27 per share compared to $42.4 million or $2.06 per share in the prior year. MGE's earnings for the twelve months ended December 31, 2007, were $37.1 million compared to $32.6 million for the same period in the prior year.
During the twelve month period ended December 31, 2007, our utility operations experienced an increase in electric revenues of $15.6 million. This increase is primarily attributable to an increase in sales volumes, the effect of a fuel surcharge and an increase in sales for resale. Additionally, the electric rates for the twelve months ended December 31, 2007, are higher than those for the same period in the prior year, when the fuel credit and refund in effect during the twelve months ended December 31, 2006, are considered. As a result of lower actual fuel costs during the twelve months ended December 31, 2006, than those costs provided in the applicable rate order, the PSCW issued an interim order implementing a $0.00454 per kWh fuel credit. Additionally, the PSCW stated that MGE's electric rates set in the final order were subject to refund, together with interest, pending a full review of MGE's 2006 actual electric fuel costs. As a result of these actions, MGE recognized an obligation to make refunds to its customers by recording a $19.1 million gross reduction to other electric revenues during the twelve months ended December 31, 2006.
For the twelve months ended December 31, 2007, fuel used for electric generation increased $7.5 million or 15.2% compared to the twelve months ended December 31, 2006. This increase is attributable to an increase in the volume of internal generation and an increase in the per-unit cost of fuel. During this same period, purchased power expense increased by $0.4 million or 0.6%. This increase is attributable to an increase in the per-unit-cost offset by a decrease in volume of power purchased.
On April 26, 2007, the PSCW approved a $0.00339 per kWh fuel surcharge on MGE's electric rates to cover increased fuel and purchased power expenses. The fuel surcharge was applied to electric rates as of the date of the PSCW order. On August 31, 2007, MGE received a final decision from the PSCW which reduced the fuel surcharge to $0.00242 per kWh. This fuel surcharge went into place on the date of the order and remained in place until December 31, 2007. These surcharges resulted in a $5.6 million increase in electric revenue for the twelve months ended December 31, 2007. Pursuant to the provisions of the April 26, 2007, surcharge order, MGE's electric revenues resulting from this surcharge were subject to refund and interest at 11%. During the twelve months ended December 31, 2007, MGE recorded a $1.3 million adjustment to other electric revenue to account for the refund provision. This refund amount was applied to customers' accounts on October 6, 2007.
During the twelve months ended December 31, 2007, gas revenues increased $12.7 million. This increase is a result of increases in sales volumes, partially offset by a decline in the costs of gas and a decrease in other gas revenues. During this period, natural gas purchased increased $11.5 million as a result of an increase in volumes and an increase in the per therm cost.
The following discussion is based on the business segments as discussed in Footnote 24.
Electric Utility Operations
Electric sales and revenues
The following table compares MGE's electric retail revenues and electric kWh sales by customer class during the years ended December 31, 2007 and 2006:
|
(In thousands) |
Revenues |
|
kWh Sales | ||||||||
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
Residential |
$113,161 |
|
$109,178 |
|
3.6% |
|
833,549 |
|
809,560 |
|
3.0% |
|
Commercial |
173,500 |
|
165,147 |
|
5.1% |
|
1,846,335 |
|
1,772,385 |
|
4.2% |
|
Industrial |
17,905 |
|
17,765 |
|
0.8% |
|
284,637 |
|
286,546 |
|
(0.7)% |
|
Other - retail/municipal |
26,859 |
|
26,710 |
|
0.6% |
|
379,785 |
|
384,222 |
|
(1.2)% |
|
Total retail |
331,425 |
|
318,800 |
|
4.0% |
|
3,344,306 |
|
3,252,713 |
|
2.8% |
|
Sales for resale |
7,076 |
|
5,585 |
|
26.7% |
|
87,203 |
|
94,988 |
|
(8.2)% |
|
Other revenues |
(4,013) |
|
(5,473) |
|
26.7% |
|
- |
|
- |
|
- |
|
Total |
$334,488 |
|
$318,912 |
|
4.9% |
|
3,431,509 |
|
3,347,701 |
|
2.5% |
|
Cooling degree days (normal 641) |
781 |
|
637 |
|
22.6% | ||||||
Electric operating revenues were up 4.9% in 2007 due to the following:
|
(In millions) |
2007 |
|
Rate changes |
$3.5 |
|
Volume |
9.1 |
|
Sales for resale |
1.5 |
|
Other revenues |
1.5 |
|
Total |
$15.6 |
•
Rates. Rates charged to retail customers for the twelve months ended December 31, 2007, were 1.1% or $3.5 million higher than those charged during the same period in the prior year.
On May 25, 2006, the PSCW approved a fuel credit to reduce 2006 electric rates by $0.00454 per kWh and stated that electric rates set in the final 2006 order are subject to refund. As a result of these provisions, customers' bills were credited $16.8 million during the twelve months ended December 31, 2006. Additionally, on April 24, 2007, when the PSCW completed their audit of 2006 electric fuel costs and issued a final order, $2.4 million (related to 2006 fuel costs including interest) was applied to customers' accounts.
On December 22, 2006, the PSCW approved a limited scope rate case reopener related to MGE's current electric rates. This order was expected to result in a net 0.15% decrease, on average, in retail electric rates for 2007 when compared to those in place for the year ended December 31, 2006 (assuming the 2006 fuel credit was in place for the entire year). Electric rates were subsequently increased from those presented in this order as a result of a $0.00339 per kWh fuel surcharge approved by the PSCW and in effect from April 26, 2007, to August 31, 2007, and a $0.00242 per kWh fuel surcharge approved by the PSCW and in effect from August 31, 2007, to December 31, 2007. These surcharges resulted in a $5.6 million increase to electric rates charged to customers during the twelve months ended December 31, 2007.
•
Volume. During 2007, there was a 2.8% increase in total retail sales volumes. This increase represents increased usage by residential and commercial.
•
Sales for resale. During 2007, sales for resale increased $1.5 million. The increase in sales for resale for the year ended December 31, 2007, when compared to the same period in the prior year is largely attributable to a change in the relationship between the cost of purchased power and the cost of internal generation.
•
Other Revenues. Other electric revenues increased $1.5 million for the twelve months ended December 31, 2007, compared to the same period in the prior year. To account for the effects of the fuel credit and refund described above under "Rates", during the twelve months ended December 31, 2006, MGE recognized a net $2.3 million reduction to other electric revenues.
In April 2007, the 2006 fuel credit of $2.3 million was provided to customers. As a result, MGE increased other revenues by the same amount to offset this credit reflected in "Rates" above.
During the twelve months ended December 31, 2007 and 2006, MGE recovered in electric rates carrying costs and other fees related to WCCF and Elm Road. MGE recorded a $8.2 million and $5.2 million reduction, respectively, to other electric revenues to eliminate the recognition of revenue related to these costs in the electric segment as revenue related to these costs is recorded by MGE Power Elm Road and MGE Power West Campus (see discussion of these revenues in the "nonregulated operations revenues" section).
For the twelve months ended December 31, 2007, MGE also experienced a $0.1 million decrease in other miscellaneous electric revenues.
Electric fuel and purchased power
In 2007, fuel used for electric generation increased $7.5 million, or 15.2%, compared to 2006. The per-unit cost of internal generation increased 4.5% for the year ended December 31, 2007, when compared to the same period in the prior year, reflecting the increased cost of natural gas.
The volume of internal generation also increased during this period reflecting a shift between internal generation and purchased power.
For the year ended December 31, 2007, purchased power expense increased by $0.4 million, or 0.6%. This increase reflects a $6.2 million or 8.1% increase in the per-unit-cost, offset by a $5.8 million or 7.0% decrease in volume of power purchased.
MGE has recorded transactions on the PJM and Midwest ISO markets in which we are buying and selling power within the same hour to meet our electric energy delivery requirements on a net basis.
Electric operating expenses
Electric operating expense increased $3.2 million in 2007. The following changes contributed to the net change in electric operating expenses for 2007:
|
(In millions) |
2007 |
|
Increased production costs |
$2.0 |
|
Decreased transmission costs |
(0.1) |
|
Increased distribution costs |
0.3 |
|
Increased customer services, promotions, and account costs |
0.2 |
|
Increased other general and administrative expenses |
0.8 |
|
Total |
$3.2 |
Included in the decrease in transmission costs is a $0.9 million cash benefit received for SECA revenues related to prior years. SECA revenues are through and out rates previously charged to MGE by PJM for transactions between RTOs which were subsequently eliminated by FERC.
Electric maintenance expense
In 2007, electric maintenance expense increased $0.8 million, or 5.7%, due to a increase in the maintenance of distribution assets ($0.7 million) and the maintenance of general and administrative facilities ($0.1 million).
Electric depreciation
Electric depreciation expense increased $0.7 million in 2007. This increase is attributable to additions to electric assets.
Gas Utility Operations
Gas deliveries and revenues
The following table compares MGE's gas retail revenues and gas delivered by customer class during each of the years ended December 31, 2007 and 2006:
|
(In thousands) |
Revenues |
|
Therms delivered | ||||||||
|
|
2007 |
|
2006 |
|
% Change |
|
2007 |
|
2006 |
|
% Change |
|
Residential |
$110,046 |
|
$101,771 |
|
8.1% |
|
92,218 |
|
84,354 |
|
9.3% |
|
Commercial/industrial |
83,799 |
|
77,681 |
|
7.9% |
|
88,330 |
|
82,255 |
|
7.4% |
|
Total retail |
193,845 |
|
179,452 |
|
8.0% |
|
180,548 |
|
166,609 |
|
8.4% |
|
Gas transportation |
2,623 |
|
2,644 |
|
(0.8)% |
|
34,645 |
|
36,385 |
|
(4.8)% |
|
Other revenues |
1,457 |
|
3,130 |
|
(53.5)% |
|
- |
|
- |
|
- |
|
Total |
$197,925 |
|
$185,226 |
|
6.9% |
|
215,193 |
|
202,994 |
|
6.0% |
|
Heating degree days (normal 7,076) |
6,935 |
|
6,520 |
|
6.4% | ||||||
|
Average rate per therm of retail customers |
$1.074 |
|
$1.077 |
|
(0.3)% | ||||||
Gas revenues increased 6.9% in 2007 due to the following:
|
(In millions) |
2007 |
|
Gas costs/rates |
$(0.6) |
|
Gas deliveries |
15.0 |
|
Other revenues |
(1.7) |
|
Total |
$12.7 |
•
Gas costs/rates. Gas costs decreased for the year ended December 31, 2007, from those costs experienced for the year ended December 31, 2006. MGE's natural gas rates are subject to a purchased gas adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates. As a result of a decrease in gas prices, MGE's average rate per therm for retail customers in 2007 decreased 0.3%.
•
Retail gas deliveries. In 2007, retail gas deliveries increased 8.4%. This increase is primarily attributable to an increase in heating degree days. Heating degree days for the year ended December 31, 2007, were 6,935 compared to 6,520 for the same period in the prior year.
•
Other gas revenues. In 2007, there was a $1.7 million decrease in other gas revenues. Under MGE's GCIM, if actual gas commodity costs are above or below a benchmark set by the PSCW, then MGE's gas sales service customers and shareholders share equally in any increased costs or savings. The PSCW allows MGE to resell gas pipeline capacity reserved to meet peak demands but not needed every day to serve customers. Revenues from capacity release that exceed or fall short of PSCW-targeted levels are shared equally. In 2007 and 2006, MGE shareholders received the benefit of $0.9 million and $2.5 million from capacity release revenues and commodity savings under the GCIM, respectively.
Natural gas purchased
In 2007, natural gas purchased increased $11.5 million, or 8.9%. Due primarily to higher retail sales volumes, the volume of natural gas purchased increased $10.8 million for the year ended December 31, 2007, when compared to the prior year. Additionally, a decrease in the natural gas purchase price coupled with an increase in the PGA provision provides for an overall increase in the cost per therm of 0.5% in 2007, which resulted in a $0.7 million overall increase in expense when compared to the prior year.
Gas operating expenses
Gas operating expense increased $0.4 million, or 1.2%, in 2007. The following changes contributed to the net change in gas operating expense for the year:
|
(In millions) |
2007 |
|
Decreased production costs |
$(0.1) |
|
Increased distribution costs |
0.4 |
|
Increased customer services, promotions, account costs |
0.3 |
|
Decreased other administrative and general expenses |
(0.2) |
|
Total |
$0.4 |
Gas maintenance expenses
Gas maintenance expense increased $0.4 million , or 17.9% in 2007. This increase primarily relates to maintenance work performed on distribution assets.
Gas depreciation
Gas depreciation expense increased $0.2 million in 2007 as a result of additional gas plant assets.
Other Income (Expense)
Other income for the year ended December 31, 2007, for the electric and gas segments was $0.1 million, compared to other expense of $1.0 million for the same period in the prior year. During 2007, the gas and electric segments recognized $1.9 million in AFUDC-equity, $0.2 million in equity earnings from miscellaneous investments, and a $0.8 million gain on the sale of investments. This income was offset partially by $0.3 million in premium expense for a HDD collar, $2.1 million in charitable contributions and $0.4 million in net miscellaneous expenses.
During 2006, the gas and electric segments recognized a total of $2.2 million in charitable contributions. This expense was partially offset by $0.6 million in AFUDC-equity and $0.6 million in other miscellaneous income. The other miscellaneous income includes a $0.6 million gain on our heating degree day financial instrument.
Interest Expense
For the year-ended December 31, 2007, total interest expense for the electric and gas segments decreased $0.4 million when compared to the same period in the prior year. For the year ended December 31, 2007, there was a $1.0 million decrease in interest expense on short-term debt, a $0.6 million increase in AFUDC-debt (which is a reduction to interest expense), and a $0.5 million increase in interest income. These decreases in interest expense were offset by a $1.7 million increase in interest expense on long-term debt. This increase relates to interest incurred on the 5.25% medium-term notes, issued on December 29, 2006.
Nonregulated Energy Operations
Nonregulated Energy operating revenues
Operating revenues from nonregulated energy operations were $20.0 million and $18.4 million for the years ended December 31, 2007 and 2006. These amounts include $14.9 million and $15.0 million, respectively, in interdepartmental revenues. The interdepartmental revenues relate to the leasing arrangement between MGE and MGE Power West Campus which commenced on April 26, 2005. In accordance with the provisions of this leasing arrangement, the Nonregulated Energy Operations, via MGE Power West Campus, recorded $14.9 million and $15.0 million in lease revenue for the years ended December 31, 2007 and 2006, respectively. Upon consolidation, this interdepartmental amount is eliminated.
Also included in operating revenues is the recognition of revenues related to carrying costs for MGE Power West Campus and MGE Power Elm Road. MGE received approval from the PSCW to collect approximately $12.1 million in carrying costs incurred by MGE Power West Campus during construction of the WCCF facility. MGE is collecting these costs in rates over a period of ten years. For each of the years ended December 31, 2007 and 2006, MGE Power West Campus recognized $1.1 million related to carrying costs on WCCF, management, demolition, and removal fees.
MGE also received approval from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm Road during construction of the Elm Road project. Current forecasts estimate the total carrying costs to be incurred to be $53.6 million. A portion of this amount is being recognized over the period allowed for recovery in rates ($32.5 million) and a portion is being deferred and will be recognized over the period in which the facility is depreciated ($21.1 million). For the years ended December 31, 2007 and 2006, MGE Power Elm Road recognized $4.1 million and $2.3 million related to carrying costs on the Elm Road project.
Nonregulated energy operations and maintenance expense
For the years ended December 31, 2007 and 2006, other operations and maintenance expense remained consistent. These expenses primarily relate to administrative and general expenses at MGE Power West Campus and MGE Power Elm Road.
Nonregulated energy depreciation expense
Depreciation expense began when the WCCF commenced operations on April 26, 2005. Depreciation expense for the year ended December 31, 2007, remained consistent when compared to the prior year.
Nonregulated energy interest expense, net
For the twelve months ended December 31, 2007, interest expense, net at the nonregulated energy operations segment was $2.5 million compared to $2.7 million for the same period in the prior year.
Interest expense for both 2007 and 2006 related to long-term borrowings at MGE Power West Campus was $2.8 million. In 2007, this interest expense is offset by a $0.1 million of miscellaneous interest income.
Also included in the nonregulated interest expense is interdepartmental interest expense at MGE Power Elm Road. During the twelve months ended December 31, 2007 and 2006, MGE Power Elm Road was charged $3.9 million and $1.9 million, respectively, in interest expense by MGE Energy on funds borrowed for the Elm Road Project. Under the provision of SFAS 34, MGE Power Elm Road capitalized all interest expense on the Elm Road Project during 2007 and 2006. For the years ended December 31, 2007 and 2006, MGE Power Elm Road recorded $0.2 million and $0.1 million in interest income on the cash advanced to Elm Road Services, LLC for construction of transmission equipment and work done by ATC related to Elm Road.
Transmission Investment Operations
Transmission investment other income (loss)
For the year ended December 31, 2007, other income at the transmission investment segment was $6.0 million, compared to $5.3 million for the same period in the prior year. The transmission investment segment holds our interest in ATC, and its income reflects our equity earnings in ATC.
All Other Operations
All other revenues
During the twelve months ended December 31, 2007 and 2006, the All Other segment did not record any revenues.
All other operations and maintenance expense
All other operations and maintenance expense for the year ended December 31, 2007, decreased $0.1 million when compared to the same period in the prior year. This decrease is related to a decrease in general and administrative expense at corporate.
All other interest income (expense)
All other interest income for the year ended December 31, 2007, was $2.3 million compared to $0.8 million for the year ended December 31, 2006. Interest income for the twelve months ended December 31, 2007 and 2006, includes $3.9 million and $1.9 million in interdepartmental income from MGE Power Elm Road. Additionally, there was $0.2 million in miscellaneous interest income for the year ended December 31, 2007. In 2007 and 2006, this interest income is offset in part by $1.8 million and $1.1 million, respectively, in interest expense on short-term debts.
Consolidated Other General Taxes
MGE Energy and MGE's other general taxes increased $0.4 million or 2.4% in 2007. This increase is primarily attributable to an increase in MGE's license fee tax and an increase in MGE's payroll taxes. The annual license fee tax expense is based on adjusted operating revenues of the prior year. These increases are slightly offset by a tax refund received for overpayment of license fees in prior years.
Consolidated Income Taxes
MGE Energy's effective income tax rate is 36.3% for the twelve months ended December 31, 2007, compared to 37.9% for the year ended December 31, 2006. This decrease is primarily attributable to the completion of tax recovery for prior year flow through. The PSCW has allowed rate recovery of deferred taxes on all temporary differences since June 1991 when the FERC Uniform System of Accounts was adopted. Unrecovered deferred taxes in existence at the time of adoption were authorized for rate recovery over 15 years. Recovery of these amounts was completed on December 31, 2006.
Other factors contributing to a decrease in the effective tax rate include the favorable settlement of an income tax examination for which a FIN 48 liability had been recorded, an increase in the domestic manufacturing tax deduction provided by the American Jobs Creation Act of 2004, a federal research tax credit under the new alternative simplified credit method, and an increase in AFUDC-equity primarily related to the Top of Iowa III project.
Minority Interest, Net of Tax
For the year ended December 31, 2007, MGE Energy (through its wholly owned subsidiary MGE Power) earned $7.7 million and $2.6 million for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy earned $0.5 million, net of tax for its interest in MGE Transco.
For the year ended December 31, 2006, MGE Energy (through its wholly owned subsidiary MGE Power) earned $7.8 million and $1.4 million for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy earned $0.4 million, net of tax for its interest in MGE Transco.
Year Ended December 31, 2006, Versus the Year Ended December 31, 2005
Executive Summary
In 2006, our earnings were $42.4 million or $2.06 per share compared to $32.1 million or $1.57 per share in the prior year. Results for 2005 were adversely impacted by the natural disasters in the Gulf of Mexico. These disasters and the related damage to the energy infrastructure, resulted in abnormally high fuel and purchased power costs that were not entirely recovered from our customers, and ultimately, lower 2005 earnings.
During 2006, utility operations experienced an increase in electric revenues of $7.9 million or 2.5%. This increase is attributable to an increase in rates, offset by decreases in retail volumes, sales for resale, and other electric revenues.
On December 12, 2005, the PSCW authorized MGE to increase 2006 electric revenues by $35.9 million. This increase was implemented to cover forecasted increases in fuel costs and the cost of additional facilities such as MGE Power West Campus and MGE Power Elm Road. During 2006, this authorized increase was partially offset by an interim credit issued by the PSCW.
For the year ended December 31, 2006, actual electric fuel costs were lower than those included in the aforementioned rate order. In 2006, fuel used for generation decreased $15.8 million or 24.3% compared to 2005. Additionally, purchased power expense decreased $4.5 million or 5.5% compared to 2005. As a result of lower actual fuel costs during 2006, the PSCW approved an interim credit and electric rates during this period were subject to refund. In response, MGE recorded a $19.1 decrease to other electric revenues to reflect the refund and credit due to customers. This amount includes $0.4 million in carrying costs incurred. As of December 31, 2006, $16.8 million of this amount had been credited on customers bills. The remaining $2.3 million was refunded to customers in March 2007.
During the year ended December 31, 2006, gas revenues decreased $15.3 million or 7.6%. This decrease is attributable to a 7.3% decrease in the cost per therm of gas and a decrease in gas deliveries.
Operation and maintenance expenses increased $8.5 million during the year ended December 31, 2006. This increase is primarily due to higher general and administrative expenses.
The following discussion is based on the business segments as discussed in Footnote 24.
Electric Utility Operations
Electric sales and revenues
The following table compares MGE's electric retail revenues and electric kWh sales by customer class during the years ended December 31, 2006 and 2005:
|
(In thousands) |
Revenues |
|
kWh Sales | ||||||||
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Residential |
$109,178 |
|
$103,674 |
|
5.3% |
|
809,560 |
|
842,758 |
|
(3.9)% |
|
Commercial |
165,147 |
|
148,294 |
|
11.4% |
|
1,772,385 |
|
1,774,035 |
|
(0.1)% |
|
Industrial |
17,765 |
|
17,432 |
|
1.9% |
|
286,546 |
|
302,294 |
|
(5.2)% |
|
Other - retail/municipal |
26,710 |
|
22,863 |
|
16.8% |
|
384,222 |
|
357,542 |
|
7.5% |
|
Total retail |
318,800 |
|
292,263 |
|
9.1% |
|
3,252,713 |
|
3,276,629 |
|
(0.7)% |
|
Sales for resale |
5,585 |
|
17,527 |
|
(68.1)% |
|
94,988 |
|
187,338 |
|
(49.3)% |
|
Other revenues |
(5,473) |
|
1,194 |
|
(558.4)% |
|
- |
|
- |
|
- |
|
Total |
$318,912 |
|
$310,984 |
|
2.5% |
|
3,347,701 |
|
3,463,967 |
|
(3.4)% |
|
Cooling degree days (normal 634) |
637 |
|
847 |
|
(24.8)% | ||||||
Electric operating revenues were up 2.5% in 2006 due to the following:
|
(In millions) |
2006 |
|
Rate changes |
$28.8 |
|
Volume |
(2.3) |
|
Sales for resale |
(11.9) |
|
Other revenues |
(6.7) |
|
Total |
$7.9 |
•
Rates. On December 12, 2005, the PSCW authorized MGE to increase 2006 electric revenues by $35.9 million to cover rising fuel and purchased power costs and the cost of additional facilities needed to meet the rising electric needs of MGE's customers.
On March 9, 2006, the PSCW approved an interim fuel credit to reduce electric rates by $0.00069 per kWh as a result of lower January fuel costs than those in the aforementioned rate order. This credit was applied to rates as of March 9, 2006. Per the terms of the order issued on March 9, 2006, MGE's rates were also subject to refund. On May 25, 2006, the PSCW approved a stipulation filed by MGE. Under this stipulation, the interim credit was increased by $0.00454 per kWh. The aforementioned orders resulted in a $16.8 million reduction to customer bills for the year ended December 31, 2006.
On December 21, 2004, the PSCW authorized MGE to increase 2005 electric revenues by $27.4 million. Due to the natural disasters in the Gulf of Mexico and the abnormally high fuel costs that resulted, on November 11, 2005, the PSCW approved an interim fuel surcharge. During 2005, MGE recorded $1.7 million in additional electric revenues under this interim order.
•
Sales for resale. During 2006, sales for resale decreased $11.9 million. Sales for resale include transactions conducted on the PJM and Midwest ISO markets reflecting our involvement in the PJM and Midwest ISO markets since their establishment on May 1, 2004, and April 1, 2005, respectively. MGE has recorded transactions on the PJM and Midwest ISO markets in which we are buying and selling power within the same hour to meet our electric energy delivery requirements on a net basis. This treatment resulted in a $154.4 million and $122.2 million reduction to sales for resale and purchased power expense for the years ended December 31, 2006 and 2005, respectively. The decrease in sales for resale for the year ended December 31, 2006, when compared to the same period in the prior year is largely attributable to a change in the relationship between the cost of purchased power and the cost of internal generation. Namely, during 2006 the cost to purchase power in certain periods was less than the cost to internally generate. Accordingly, MGE was purchasing more power from the market than they were selling power into the market for the year ended December 31, 2006, when compared to the same period in 2005.
•
Volume. During 2006, there was a 0.7% decrease in total retail sales volumes. This decrease is primarily attributable to cooler temperatures during the summer months. Cooling degree days for the year ended December 31, 2006, decreased 24.8% from 847 for the year ended December 31, 2005, to 637 for the year ended December 31, 2006.
•
Other Revenues. Other electric revenues decreased $6.7 million for the twelve months ended December 31, 2006, compared to the same period in the prior year. During the twelve months ended December 31, 2006, MGE recorded a net $2.3 million reduction to other electric revenues to account for the effects of the interim orders described above under "Rates."
During the year ended December 31, 2006, MGE recovered in electric rates carrying costs on WCCF and Elm Road. MGE recorded a $5.2 million adjustment to other electric revenues to eliminate the recognition of revenue related to these costs in the electric segment as revenue related to these carrying costs is recorded by MGE Power Elm Road and MGE Power West Campus (see discussion of these revenues in the "nonregulated operations revenue" section).
For the year ended December 31, 2005, MGE recorded a $0.8 million adjustment to other electric revenues to eliminate the recognition of revenues related to carrying costs on MGE Power West Campus.
Electric fuel and purchased power
In 2006, fuel used for electric generation decreased $15.8 million, or 24.3%, compared to 2005. The per-unit cost of internal generation decreased 11.3% for the year ended December 31, 2006, when compared to the same period in the prior year, reflecting the decreased cost of natural gas. Recall that fuel costs in 2005 were abnormally high due to the natural disasters that occurred in the Gulf of Mexico and the reduction in natural gas supplies that resulted.
The volume of internal generation also decreased during this period reflecting a shift between internal generation and purchased power. Namely, MGE found that during certain time periods it was more cost effective to satisfy demand through purchased power, rather than internal generation.
Despite a 14.5% increase in the volume of purchased power for the year ended December 31, 2006, purchased power expense decreased by $4.5 million, or 5.5%. This decrease reflects a 17.5% decrease in the per-unit-cost partially offset by the aforementioned increase in volume.
MGE has recorded transactions on the PJM and Midwest ISO markets in which we are buying and selling power within the same hour to meet our electric energy delivery requirements on a net basis. This treatment resulted in a $154.4 million and $122.2 million reduction to purchased power expense for the years ended December 31, 2006 and 2005, respectively.
Electric operating expenses
Electric operating expense increased $7.9 million in 2006. The following changes contributed to the net change in electric operating expenses for 2006:
|
(In millions) |
2006 |
|
Increased rent expense (a) |
$4.9 |
|
Increased other general and administrative expenses |
2.7 |
|
Increased transmission costs |
0.1 |
|
Decreased production costs |
(0.8) |
|
Increased distribution costs |
0.4 |
|
Increased customer services, promotions, and account costs |
0.6 |
|
Total |
$7.9 |
(a)
This increase relates to the commencement of the leasing arrangement between MGE and MGE Power West Campus on April 26, 2005. In accordance with the terms of this leasing arrangement, the electric segment recorded $15.0 million and $10.1 million in rent expense for the years ended December 31, 2006 and 2005, respectively. Upon consolidation, this amount is eliminated.
Electric maintenance expense
In 2006, electric maintenance expense increased $1.1 million, or 8.4%, due to a increase in the maintenance of distribution assets ($1.0 million) and the maintenance of general and administrative facilities ($0.1 million).
Electric depreciation
Electric depreciation expense increased $0.8 million in 2006. This increase is attributable to additions to electric production assets at the Columbia and Blount facilities.
Gas Utility Operations
Gas deliveries and revenues
The following table compares MGE's gas retail revenues and gas delivered by customer class during each of the years ended December 31, 2006 and 2005:
|
(In thousands) |
Revenues |
|
Therms delivered | ||||||||
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Residential |
$101,771 |
|
$ 111,509 |
|
(8.7)% |
|
84,354 |
|
91,887 |
|
(8.2)% |
|
Commercial/industrial |
77,681 |
|
82,956 |
|
(6.4)% |
|
82,255 |
|
82,661 |
|
(0.5)% |
|
Total retail |
179,452 |
|
194,465 |
|
(7.7)% |
|
166,609 |
|
174,548 |
|
(4.5)% |
|
Gas transportation |
2,644 |
|
2,881 |
|
(8.2)% |
|
36,385 |
|
45,435 |
|
(19.9)% |
|
Other revenues |
3,130 |
|
3,187 |
|
(1.8)% |
|
- |
|
- |
|
- |
|
Total |
$185,226 |
|
$200,533 |
|
(7.6)% |
|
202,994 |
|
219,983 |
|
(7.7)% |
|
Heating degree days (normal 7,108) |
6,520 |
|
6,840 |
|
(4.7)% | ||||||
|
Average rate per therm of retail customers |
$1.077 |
|
$1.114 |
|
(3.3)% | ||||||
Gas revenues decreased 7.6% in 2006 due to the following:
|
(In millions) |
2006 |
|
Gas costs/rates |
$ (6.5) |
|
Gas deliveries |
(8.5) |
|
Gas transportation |
(0.2) |
|
Other effects |
(0.1) |
|
Total |
$(15.3) |
•
Gas costs/rates. Gas costs decreased significantly for the year ended December 31, 2006, from those costs experienced for the year ended December 31, 2005. MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates. As a result of a decrease in gas prices, MGE's average rate per therm for retail customers in 2006 decreased 3.3%.
•
Retail gas deliveries. In 2006, retail gas deliveries decreased 4.5%. This decrease is primarily attributable to warmer temperatures. Heating degree days for the year ended December 31, 2006, were 6,520 compared to 6,840 for the same period in the prior year.
•
Transportation and other gas revenues. In 2006, there was a $0.3 million decrease in transportation and other gas revenues. This decrease represents a $0.2 million decrease in transportation revenues and a $0.1 million decrease in revenues earned under the GCIM and other miscellaneous gas revenues. Under MGE's GCIM, if actual gas commodity costs are above or below a benchmark set by the PSCW, then MGE's gas sales service customers and shareholders share equally in any increased costs or savings. The PSCW allows MGE to resell gas pipeline capacity reserved to meet peak demands but not needed every day to serve customers. Revenues from capacity release that exceed or fall short of PSCW-targeted levels are shared equally. In 2006 and 2005, MGE shareholders received the benefit of $2.5 million and $2.7 million from capacity release revenues and commodity savings under the GCIM, respectively.
Natural gas purchased
In 2006, natural gas purchased decreased $16.8 million, or 11.5%. This decrease is primarily due to lower average wellhead prices. Natural gas prices (cost per therm) decreased 7.3% in 2006. As mentioned, in 2005 natural gas prices were atypically high due to the natural disasters that occurred in the Gulf of Mexico. For the year ended December 31, 2006, the amount of natural gas purchased also decreased from those levels experienced for the same period in the prior year. Due primarily to lower retail sales volumes, the volume of natural gas purchased decreased 4.6% for the year ended December 31, 2006.
Gas operating expenses
Gas operating expense increased $4.1 million, or 15.3%, in 2006. The following changes contributed to the net change in gas operating expense for the year:
|
(In millions) |
2006 |
|
Increased production costs |
$0.4 |
|
Increased other administrative and general expenses |
2.0 |
|
Increased distribution costs |
0.2 |
|
Increased customer services, promotions, account costs |
1.5 |
|
Total |
$4.1 |
Gas maintenance expenses
Gas maintenance expense for the year ended December 31, 2006, did not change from the $2.3 million experienced for the same period in the prior year. This expense primarily relates to maintenance work performed on distribution assets.
Gas depreciation
Gas depreciation expense increased $0.4 million in 2006 as a result of additional gas plant assets. For example, during the year ended December 31, 2006, additional mains, services, and meters were placed in service.
Other Income (Expense)
Other expense for the year ended December 31, 2006, for the electric and gas segments was $1.0 million, compared to other income of $0.1 million for the same period in the prior year. During 2006, the gas and electric segments recognized a total of $2.2 million in charitable contributions. This expense was partially offset by $0.6 million in AFUDC-equity and $0.6 million in other miscellaneous income. The other miscellaneous income includes a $0.6 million gain on our heating degree day instrument.
For the year ended December 31, 2005, the gas and electric segments recognized a total of $0.4 million in AFUDC-equity funds and a $0.1 million gain on the sale of assets. This income was offset by $0.2 million in charitable contributions recorded in the electric and gas segments and $0.2 million in miscellaneous expense, net.
Interest Expense
For the year-ended December 31, 2006, total interest expense for the electric and gas segments increased $1.2 million when compared to the same period in the prior year. For the year ended December 31, 2006, there was a $1.3 million increase in interest expense on short-term debt at the electric and gas segments as a result of increased interest rates and higher levels of short-term debt for much of the year. These increases were offset by a $0.1 million increase in AFUDC-debt income at the electric and gas segments.
Nonregulated Energy Operations
Nonregulated Energy operating revenues
Operating revenues from nonregulated energy operations were $18.4 million for the year ended December 31, 2006. This amount includes $15.0 million in interdepartmental revenues. The interdepartmental revenues relate to the leasing arrangement between MGE and MGE Power West Campus which commenced on April 26, 2005. In accordance with the provisions of this leasing arrangement, the Nonregulated Energy Operations, via MGE Power West Campus, recorded $15.0 million and $10.1 million in lease revenue for the years ended December 31, 2006 and 2005, respectively. Upon consolidation, this interdepartmental amount is eliminated.
Also included in operating revenues is the recognition of revenues related to carrying costs for MGE Power West Campus and MGE Power Elm Road (2006 only). MGE received approval from the PSCW to collect approximately $12.1 million in carrying costs incurred by MGE Power West Campus during construction of the WCCF facility. MGE is collecting these costs in rates over a period of ten years. Of these costs, $4.1 million relates to the capitalized interest and the debt portion of the facility. These costs are recognized over the period in which the facility is being depreciated (40 years). The remaining amount of $8.0 million represents the equity portion and is recognized over the ten-year period for recovery in rates. For the years ended December 31, 2006 and 2005, MGE Power West Campus recognized $1.1 million and $0.6 million, respectively, related to carrying costs on WCCF, management, demolition, and removal fees.
MGE also received approval from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm Road during construction of the Elm Road project. Current forecasts estimate the total carrying costs to be incurred to be $54.3 million. A portion of this amount is being recognized over the period allowed for recovery in rates ($32.6 million) and a portion is being deferred and will be recognized over the period in which the facility is depreciated ($21.7 million). For the year ended December 31, 2006, MGE Power Elm Road recognized $2.3 million related to carrying costs on the Elm Road project.
Nonregulated energy operations and maintenance expense
For the years ended December 31, 2006 and 2005, other operations and maintenance expense remained consistent. These expenses primarily relate to administrative and general expenses at MGE Power West Campus and MGE Power Elm Road.
Nonregulated energy depreciation expense
Depreciation expense began when the WCCF commenced operations on April 26, 2005. Depreciation expense for the year ended December 31, 2006, was $2.7 million compared to $1.9 million for the year ended December 31, 2005, reflecting a partial year of depreciation in 2005.
Nonregulated energy interest expense, net
For the twelve months ended December 31, 2006, interest expense, net at the nonregulated energy operations segment increased $1.1 million compared to the same period in the prior year. Interest expense at the nonregulated energy segment for the year ended December 31, 2006, represents interest expense on the long-term borrowings held by MGE Power West Campus. On September 30, 2003, MGE Power West Campus issued $30.0 million of 5.68% senior secured notes maturing September 25, 2033 and on October 27, 2005, issued $20.0 million of 5.19% senior secured notes also due September 25, 2033. Interest expense for the twelve months ended December 31, 2006 and 2005, related to these borrowings was $2.8 million and $1.9 million, respectively.
Also included in the nonregulated interest expense is interdepartmental interest expense at MGE Power Elm Road and MGE Power West Campus. During the twelve months ended December 31, 2006 and 2005, MGE Power Elm Road was charged $1.9 million and $0.2 million, respectively, in interest expense by MGE Energy on funds borrowed for the Elm Road Project. This expense is eliminated upon consolidation. During the year ended December 31, 2005, MGE Power West Campus recorded $0.4 million in interdepartmental interest expense. This expense is also eliminated upon consolidation.
The interest expense at MGE Power Elm Road is offset by $1.9 million and $0.2 million in capitalized interest during the twelve months ended December 31, 2006 and 2005, respectively. Under the provision of SFAS 34, MGE Power Elm Road is capitalizing interest on the Elm Road Project. During construction of the WCCF, MGE Power West Campus also recorded capitalized interest in accordance with the provisions of SFAS 34. During the twelve months ended December 31, 2005, $0.7 million in capitalized interest was recognized as an offset to interest expense. On April 26, 2005, when the electric generation facilities of WCCF began generating electricity, MGE Power West Campus discontinued the capitalization of interest, as the project was deemed to be substantially complete.
For the year ended December 31, 2006, MGE Power Elm Road recorded $0.1 million in interest income on the cash advanced to Elm Road Services, LLC for construction of transmission equipment and work done by ATC related to Elm Road.
Transmission Investment Operations
Transmission investment other income (loss)
For the year ended December 31, 2006, other income at the transmission investment segment was $5.3 million, compared to $4.9 million for the same period in the prior year. The transmission investment segment holds our interest in ATC, and its income reflects our equity earnings in ATC.
All Other Operations
All other revenues
During the twelve months ended December 31, 2006, the All Other segment did not record any revenues. However, MGE Construct received service fees of $1.3 million from the State in 2005. The service fees earned relate to MGE Construct's role as EPC contractor for WCCF. This amount is classified as nonregulated revenue within MGE Energy's financial statements. The total fee of $5.0 million had been recognized at December 31, 2005. This amount was recognized as services were rendered and was collected over a 22-month period.
All other operations and maintenance expense
All other operations and maintenance expense for the year ended December 31, 2006, increased $0.2 million when compared to the same period in the prior year. This increase is related to a increase in general and administrative expense at corporate. For the year ended December 31, 2005, the all other segment recorded a $0.2 million gain as a result of the settlement of disputed legal fees.
All other interest income (expense)
All other interest income for the year ended December 31, 2006, was $0.8 million compared to $0.1 million for the year ended December 31, 2005. Interest income for the twelve months ended December 31, 2006 and 2005, includes $1.9 million and $0.2 million in interdepartmental income from MGE Power Elm Road. Additionally, for the year ended December 31, 2005, this balance includes $0.4 million in interdepartmental income from MGE Power West Campus. This interest income is eliminated upon consolidation. This interest income for the year ended December 31, 2006, is offset in part by $1.1 million in interest expense on short-term debt. Interest expense on these borrowings was $0.5 million for the same period in the prior year.
Consolidated Other General Taxes
MGE Energy and MGE's other general taxes increased 16.1% in 2006 primarily because MGE's license fee tax increased. The annual license fee tax expense is based on adjusted operating revenues of the prior year. Tax rates have not increased.
Consolidated Income Taxes
MGE Energy's effective income tax rate is 37.9% for 2006 compared to 38.2% in 2005. The lower effective tax rate is chiefly due to the recognition, in 2006, of tax benefits from the domestic manufacturing deduction, as provided by the American Jobs Creation Act of 2004, over time periods related to PSCW rate action.
Minority Interest, Net of Tax
For the year ended December 31, 2006, MGE Energy (through its wholly owned subsidiary MGE Power) earned $7.8 million and $1.4 million for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy earned $0.4 million, net of tax for its interest in MGE Transco.
For the year ended December 31, 2005, MGE Energy earned $5.4 million, net of tax , for its interest in MGE Power West Campus and less than $0.1 million for its interest in MGE Transco and MGE Power Elm Road. These amounts are recorded as minority interest expense, net of tax, on MGE's Consolidated Statement of Income.
Liquidity and Capital Resources
Cash Flows
The following summarizes cash flows for MGE Energy and MGE during the twelve months ended 2007, 2006, and 2005:
|
|
MGE Energy |
|
MGE | ||||||||
|
(In thousands) |
2007 |
|
2006 |
|
2005 |
|
2007 |
|
2006 |
|
2005 |
|
Cash provided by/(used for): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
$ 76,586 |
|
$101,039 |
|
$ 53,377 |
|
$ 78,542 |
|
$ 97,224 |
|
$ 32,843 |
|
Investing activities |
(134,791) |
|
(94,441) |
|
(75,733) |
|
(134,137) |
|
(94,382) |
|
(75,523) |
|
Financing activities |
58,991 |
|
(6,926) |
|
22,183 |
|
56,208 |
|
(2,418) |
|
42,589 |
Cash Provided by Operating Activities
MGE Energy
MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.
2007 vs. 2006
Cash provided by operating activities decreased $24.5 million for the twelve months ended December 31, 2007, when compared to the same period in the prior year. This decrease is primarily attributable to increases in accounts receivable and unbilled revenues. MGE Energy's working capital accounts contributed to $8.5 million in cash used for operating activities for the twelve months ended December 31, 2007, compared to $8.7 million in cash provided by operating activities during the same period in the prior year.
During the twelve months ended December 31, 2007 and 2006, MGE Energy made $6.3 million and $5.8 million, respectively, in discretionary contributions to the pension and other postretirement benefit plans.
MGE Energy recorded $1.9 million in AFUDC-equity funds for the twelve months ended December 31, 2007, compared to $0.6 million for the same period in the prior year. This increase is primarily attributable to the construction of the Top of Iowa III wind generation project. Construction of this project is expected to be completed in the first quarter of 2008.
During the twelve months ended December 31, 2007, MGE Energy recorded a $3.1 million provision for doubtful accounts. This represents a $0.2 million decrease from the amount recorded during the same period in the prior year. The provision during 2006 was higher due to the atypically high fuel costs experienced in the latter portion of 2005 and the effects these costs had on the composition of the aging.
During the twelve months ended December 31, 2007, MGE Energy also recorded a $0.8 million gain on the sale of equity investments.
During the twelve months ended December 31, 2007, more working capital was used to support higher receivables and unbilled revenues, partially offset by an increase in payables and a decrease in inventories. In addition, there was a decrease in short term liabilities reflecting, in part, the payment of a $2.3 million refund to customers on April 24, 2007. That refund is the result of the interim fuel credit and subject to refund provision instituted by the PSCW in 2006. This payment had no impact on net income for the twelve months ended December 31, 2007. Included in the December 31, 2006, operating cash flows is the collection of the $2.4 million of the retainage receivable from the State under the EPC agreement related to the construction of WCCF. Cash outflows related to other noncurrent items, net were $1.8 million for the twelve months ended December 31, 2007, compared to cash inflows of $4.4 million in the twelve months ended December 31, 2006.
During the twelve months ended December 31, 2007, MGE Energy received $2.5 million in cash proceeds as a result of the Congestion Cost and Line Loss Allocation Services Agreement that they are a party to.
For the twelve months ended December 31, 2007, MGE Energy recorded $6.0 million in equity earnings from ATC and received $4.4 million in cash dividends from ATC. For the same period in the prior year, MGE Energy recorded $5.3 million in equity earnings from ATC and received $4.0 million in cash dividends from ATC.
2006 vs. 2005
Cash provided by operating activities increased $47.7 million for the year ended December 31, 2006, when compared to the same period in the prior year. This increase is primarily attributable to an increase in net income and decreases in accounts receivable, inventories, and unbilled revenues. Namely, MGE Energy's net income increased $10.3 million for the year ended December 31, 2006, when compared to the same period in the prior year. MGE Energy's working capital accounts contributed to $8.7 million in cash provided by operating activities, compared to a use of cash of $23.8 million for the same period in the prior year.
As a result of the natural disasters that occurred in the Gulf of Mexico, fuel costs were atypically high in the latter portion of 2005. The high fuel costs had several impacts on the financial statements of MGE Energy for the year ended December 31, 2005. For instance, high fuel costs ultimately resulted in an increase to both electric and gas rates. The increase in rates for both the electric and gas segment resulted in higher billed and unbilled receivables at December 31, 2005. Additionally, the increase in fuel costs above those forecasted in MGE's rate order, was a source of the lower net income that was experienced for the year ended December 31, 2005, and caused the cost of inventories, such as gas in storage to be atypically high. The offsetting impact on cash flows of these disasters in 2005 is a reduction in accounts payable. Because of the high costs of gas, accounts payable levels at December 31, 2005, were higher than normal levels.
During 2006 and 2005, MGE Construct collected $2.4 million and $2.5 million of the retainage receivable from the State under the EPC agreement related to the construction of the WCCF, respectively. Additionally, during the year ended December 31, 2006, MGE billed $2.3 million (net of $16.8 million returned to customers between March 9, 2006, and December 31, 2006) in electric rates which, pursuant to an interim order issued by the PSCW, was required to be refunded to customers. This credit was recorded as a reduction to other electric revenues in the consolidated income statement of MGE Energy for the twelve months ended December 31, 2006, and is shown as a noncash adjustment to net income on the consolidated statement of cash flows of MGE Energy.
Other noncurrent items, net contributed $4.4 million to cash flows from operations for the year ended December 31, 2006, compared to $0.7 million in cash used for operations for the year ended December 31, 2005. Additionally, during the years ended December 31, 2006 and 2005, MGE Energy made $5.8 million and $5.5 million in voluntary cash contributions to the pension and other postretirement plans, respectively.
During the year ended December 31, 2006, MGE recorded a $3.2 million provision for doubtful accounts. This represents a $1.2 million increase from the amount recorded during the same period in the prior year. In 2006 MGE experienced a deterioration in the composition of the aging of its accounts receivable largely attributable to the increase in gas and electric rates that was experienced in the latter portion of 2005. MGE recorded $10.2 million in employee benefit expenses compared to $9.7 million for the prior year. See Footnote 13 for further discussion of MGE Energy's Pension and Other Postretirement Benefits.
For the year ended December 31, 2006, MGE Energy recorded $5.3 million in equity earnings from ATC and $4.0 million in cash dividends received from ATC. For the same period in the prior year, MGE Energy recorded $4.9 million in equity earnings from ATC and $3.6 million in cash dividends from ATC.
There was a $5.7 million decrease in deferred tax expense between 2006 and 2005. This decrease is largely attributable to the expiration, on December 31, 2005, of federal law permitting bonus tax depreciation. This law allowed taxpayers to claim additional bonus depreciation equal to 50% of the qualifying basis of certain property placed in service prior to January 1, 2006. For the year ended December 31, 2005, bonus tax depreciation resulted in approximately $11.2 million in deferred tax expense, due to the placement in service of WCCF.
MGE
2007 vs. 2006
Cash provided by operating activities decreased $18.7 million for the twelve months ended December 31, 2007, when compared to the same period in the prior year. This decrease is primarily attributable to increases in accounts receivable and unbilled revenues. MGE's working capital accounts contributed $7.6 million in cash used for operating activities for the twelve months ended December 31, 2007, compared to $5.5 million in cash provided by operating activities during the same period in the prior year.
During the twelve months ended December 31, 2007 and 2006, MGE made $6.3 million and $5.8 million, respectively, in discretionary contributions to the pension and other postretirement benefit plans.
MGE recorded $1.9 million in AFUDC-equity funds for the twelve months ended December 31, 2007, compared to $0.6 million for the same period in the prior year. This increase is primarily attributable to the construction of the Top of Iowa III wind generation project.
During the twelve months ended December 31, 2007, MGE recorded a $3.1 million provision for doubtful accounts. This represents a $0.2 million decrease from the amount recorded during the same period in the prior year. The provision during 2006 was higher due to the atypically high fuel costs experienced in the latter portion of 2005 and the effects these costs had on the composition of the aging.
During the twelve months ended December 31, 2007, MGE also recorded a $0.8 million gain on the sale of equity investments.
MGE's working capital accounts contributed to $7.6 million in cash used for operating activities for the twelve months ended December 31, 2007, compared to $5.5 million in cash provided by operating activities during the same period in the prior year. During the twelve months ended December 31, 2007, more working capital was used to support higher receivable and unbilled revenues balances, partially offset by an increase in payables and a decrease in inventories. In addition, there was a decrease in short term liabilities reflecting, in part, the payment of a $2.3 million refund to customers on April 24, 2007. That refund is the result of the interim fuel credit and subject to refund provision instituted by the PSCW in 2006. This payment had no impact on net income for the twelve months ended December 31, 2007. Cash outflows related to other noncurrent items, net were $2.0 million for the twelve months ended December 31, 2007, compared to cash inflows of $4.4 million in the twelve months ended December 31, 2006.
During the twelve months ended December 31, 2007, MGE received $2.5 million in cash proceeds as a result of the Congestion Cost and Line Loss Allocation Services Agreement that they are a party to.
For the twelve months ended December 31, 2007, MGE recorded $6.0 million in equity earnings from ATC and received $4.4 million cash dividends from ATC. For the same period in the prior year, MGE recorded $5.3 million in equity earnings from ATC and received $4.0 million in cash dividends from ATC.
Minority interest, net of tax was $10.7 million for the twelve months ended December 31, 2007, compared to $9.6 million for the same period in the prior year. This increase primarily relates to an increase in carrying cost revenue recorded by MGE Power Elm Road.
2006 vs. 2005
Cash provided by operating activities increased $64.4 million for the year ended December 31, 2006, when compared to the same period in the prior year. This increase is primarily attributable to an increase in net income and decreases in accounts receivable, inventories, and unbilled revenues. Namely, MGE's net income increased $6.6 million for the year ended December 31, 2006, when compared to the same period in the prior year. MGE's working capital accounts contributed to $5.5 million in cash provided by operating activities, compared to a use of cash of $43.8 million for the same period in the prior year.
As a result of the natural disasters that occurred in the Gulf of Mexico, fuel costs were atypically high in the latter portion of 2005. The high fuel costs had several impacts on the financial statements of MGE for the year ended December 31, 2005. For instance, high fuel costs ultimately resulted in an increase to both electric and gas rates. The increase in rates for both the electric and gas segment resulted in higher billed and unbilled receivables at December 31, 2005. Additionally, the increase in fuel costs above those forecasted in MGE's rate order, was a source of the lower net income that was experienced for the year ended December 31, 2005, and caused the cost of inventories, such as gas in storage to be atypically high. The offsetting impact on cash flows of these disasters in 2005 is a reduction in accounts payable. Because of the high costs of gas, accounts payable levels at December 31, 2005, were higher than normal levels.
Other noncurrent items, net resulted in $4.4 million in cash provided by operating activities for the year ended December 31, 2006, compared to $0.6 million in cash used by operating activities for the same period in the prior year. Additionally, during the years ended December 31, 2006 and 2005, MGE made $5.8 million and $5.5 million in voluntary cash contributions to the pension and other postretirement plans.
During the year ended December 31, 2006, MGE billed $2.3 million (net of $16.8 million returned to customers between March 9, 2006, and December 31, 2006) in electric rates which, pursuant to an interim order issued by the PSCW, is required to be refunded to customers. This credit was recorded as a reduction to other electric revenues in the consolidated income statement of MGE for the twelve months ended December 31, 2006, and is shown as a noncash adjustment to net income on the consolidated statement of cash flows of MGE.
During the year ended December 31, 2006, MGE recorded a $3.2 million provision for doubtful accounts. This represents a $1.2 million increase from the amount recorded during the same period in the prior year. In 2006, MGE experienced a deterioration in the composition of the aging of its accounts receivable largely attributable to the increase in gas and electric rates that was experienced in the latter portion of 2005. MGE recorded $10.2 million in employee benefit expenses compared to $9.7 million for the prior year. See Footnote 13 for further discussion of MGE's Pension and Other Postretirement Benefits.
For the year ended December 31, 2006, MGE recorded $5.3 million in equity earnings from ATC and $4.0 million in cash dividends received from ATC. For the same period in the prior year, MGE recorded $4.9 million in equity earnings from ATC and $3.6 million in cash dividends from ATC.
There was a $6.1 million decrease in deferred tax expense between 2006 and 2005. This decrease is largely attributable to the expiration, on December 31, 2005, of federal law permitting bonus tax depreciation. This law allowed taxpayers to claim additional bonus depreciation equal to 50% of the qualifying basis of certain property placed in service prior to January 1, 2006. For the year ended December 31, 2005, bonus tax depreciation resulted in approximately $11.2 million in deferred tax expense, due to the placement in service of WCCF.
For the year ended December 31, 2006, MGE recorded $9.6 million in minority interest, net of tax, compared to $5.4 million for the same period in the prior year. This amount relates to net income earned by MGE Energy from its interest in MGE Power West Campus, MGE Power Elm Road, and MGE Transco.
Capital Requirements and Investing Activities
MGE Energy
2007 vs. 2006
In 2007, MGE Energy's cash used for investing activities increased $40.4 million. Capital expenditures for the year ended December 31, 2007, were $136.3 million. This amount represents a $43.7 million increase in capital expenditures from those made in the prior year. This increase is related to the construction activity for the Elm Road project ($23.3 million) and the Top of Iowa III wind project ($25.8 million). These increases are partially offset by a $1.6 million decrease in capital expenditures related to WCCF and a $3.8 million decrease in other MGE utility plant additions.
During 2007, MGE Energy made $0.3 million in capital contributions to miscellaneous investments. MGE Energy did not make any cash capital contributions to ATC. However, MGE (through MGE Transco) transferred $1.4 million in certain transmission assets to ATC in 2007. In exchange for this transfer, MGE Transco received $0.7 million in cash proceeds and $0.7 million in an additional investment in ATC. During the year ended December 31, 2006, MGE Energy made $2.0 million in capital contributions to ATC and other equity investments.
In 2007 and 2006 in connection with the Elm Road project, MGE Power Elm Road advanced $0.1 million and $0.8 million in funds to the WEPCO, who in turn provided these funds to ATC, respectively. These funds will be used by ATC for transmission system upgrades related to the Elm Road project. The majority of these funds are expected to be repaid when the first unit at Elm Road achieves commercial operation.
During the year ended December 31, 2007, MGE Energy's cash provided by other cash investing activities was $1.1 million compared to $0.9 million in the prior year. During the twelve months ended December 31, 2007, MGE Energy received $0.9 million in cash proceeds from the sale of equity investments.
2006 vs. 2005
In 2006, MGE Energy's cash used for investing activities increased $18.7 million. Capital expenditures for the year ended December 31, 2006, were $92.6 million. This amount represents a $6.8 million increase from those made in the prior year. This increase is related to the construction activity for the Elm Road project ($5.1 million) and the Top of Iowa III wind project ($10.7 million). These increases are partially offset by a $8.5 million decrease in capital expenditures related to WCCF, reflecting the substantial completion of that project in April 2005 and a $0.5 million decrease in other MGE utility plant additions. During 2006 and 2005, MGE Energy made a $1.9 million and a $1.4 million capital contribution to ATC, respectively. Additionally, during 2006 and 2005, MGE Energy made $0.1 million and $0.3 million in capital contribution to other investments.
In the first quarter 2005, MGE collected $13.0 million in funds previously advanced to ATC in conjunction with the WCCF project. No additional funds were advanced to ATC directly during 2005 or 2006. Although MGE Energy did not advance any funds to ATC directly during the aforementioned periods, funds were indirectly advanced to ATC. Namely, in 2006 and 2005 in connection with the Elm Road project, MGE Power Elm Road advanced $0.8 million and $1.6 million in funds to the WEPCO, who in turn provided these funds to ATC, respectively. These funds will be used by ATC for transmission system upgrades related to the Elm Road project. These funds are expected to be repaid in full when the project is operational.
During the year ended December 31, 2006, MGE Energy's cash provided by other cash investing activities was $0.9 million compared to $0.4 million in the prior year.
MGE
2007 vs. 2006
In 2007, MGE's cash used for investing activities increased $39.8 million. Capital expenditures for the year ended December 31, 2007, were $136.3 million. This amount represents a $43.7 million increase in capital expenditures from those made in the prior year. This increase is related to the construction activity for the Elm Road project ($23.3 million) and the Top of Iowa III wind project ($25.8 million). These increases are partially offset by a $1.6 million decrease in capital expenditures related to WCCF and a $3.8 million decrease in other MGE utility plant additions.
During 2007, MGE made $0.1 million in capital contributions to miscellaneous investments. MGE did not make any cash capital contributions to ATC. However, MGE (through MGE Transco) transferred $1.4 million in certain transmission assets to ATC in 2007. In exchange for this transfer, MGE Transco received $0.7 million in cash proceeds and $0.7 million in an additional investment in ATC. During the year ended December 31, 2006, MGE made $1.9 million in capital contributions to ATC and other equity investments.
In 2007 and 2006 in connection with the Elm Road project, MGE Power Elm Road advanced $0.1 million and $0.8 million in funds to the WEPCO, who in turn provided these funds to ATC, respectively. These funds will be used by ATC for transmission system upgrades related to the Elm Road project. The majority of these funds are expected to be repaid when the first unit at Elm Road achieves commercial operation.
During the year ended December 31, 2007, MGE's cash provided by other cash investing activities was $1.6 million compared to $0.9 million in the prior year. During the twelve months ended December 31, 2007, MGE received $0.9 million in cash proceeds from the sale of equity investments.
2006 vs. 2005
Cash used for investing activities was $94.4 million for 2006, compared to $75.5 million in the prior year. Capital expenditures for the year ended December 31, 2006, were $92.6 million. This amount represents a $6.8 million increase from those made in the prior year. This increase is related to the construction activity for the Elm Road project ($5.1 million) and the Top of Iowa III wind project ($10.7 million). These increases are partially offset by a $0.5 decrease in other MGE utility plant additions and a $8.5 million decrease in capital expenditures related to WCCF, reflecting the substantial completion of that project in April 2005. During 2006 and 2005, MGE Transco made capital contributions to ATC totaling $1.9 million and $1.4 million, respectively. In the first quarter of 2005, MGE collected $13.0 million in funds previously advanced to ATC in conjunction with the WCCF project. No additional funds were advanced to ATC directly during 2005 or 2006. Although MGE did not advance any funds to ATC directly in 2005 or 2006, funds were indirectly advanced to ATC. Namely, in 2006 and 2005 in connection with the Elm Road project, MGE Power Elm Road advanced $0.8 million and $1.6 million, respectively in funds to WEPCO, who in turn provided these funds to ATC. These funds will be used by ATC for transmission system upgrades related to the Elm Road project. These funds are expected to be repaid in full.
During the year ended December 31, 2006, cash provided by other investing activities was $0.9 million compared to $0.4 million for the same period in the prior year.
Capital expenditures
The following table shows MGE Energy's budgeted capital expenditures for 2008 and actual capital expenditures for both 2007 and 2006:
|
(In thousands) For the years ended December 31 |
2008 (Budget) |
|
2007 (Actual) |
|
2006 (Actual) |
|
Electric : |
$36,674 |
|
$70,687 |
|
$50,604 |
|
Gas |
14,502 |
|
12,091 |
|
10,206 |
|
Utility plant total |
51,176 |
|
82,778 |
|
60,810 |
|
Nonregulated |
43,729 |
|
53,480 |
|
31,765 |
|
MGE Energy total |
$94,905 |
|
$136,258 |
|
$92,575 |
As of December 31, 2007, MGE and MGE Energy had a working capital deficit (current liabilities exceeded current assets). This deficit is in part due to MGE currently funding the majority of its capital commitments for the Top of Iowa III wind project and the Elm Road project with short-term debt and the reclassification of $30.0 million of long term debt which matures in September 2008, from a long-term to a current liability. MGE intends to refinance the $30 million medium-term note with an additional long-term debt facility. MGE intends to fund future capital commitments for these projects with funds generated from normal operations, the issuance of long tem debt, and financing received from MGE Energy. MGE Energy intends to raise the funds for such financing primarily through the issuance of equity securities and short-term debt, as needed.
MGE Energy's and MGE's liquidity is primarily affected by their construction requirements. We allocate common plant for the financial statements and footnotes based on a prescribed formula (60% (electric) and 40% (gas)). MGE Energy's major 2007 capital projects include Elm Road and the Top of Iowa III wind project. During 2007, $53.0 million in capital expenditures were incurred for the construction of Elm Road. Included in this amount is $3.9 million of interest capitalized in accordance with the provisions set forth in SFAS No. 34, Capitalization of Interest Cost. During 2007, MGE expended $36.5 million on capital additions for the construction of the Top of Iowa III wind project and recorded an additional $2.2 million in AFUDC.
As of December 31, 2007, MGE Power Elm Road's remaining capital commitments for the Elm Road project are estimated to be $72.0 million. Included in this amount is $4.5 million, which has been accrued and recorded as construction work in progress at December 31, 2007. Based on current forecasts, capital expenditures for this project are expected to be $48.0 million in 2008, $20.5 million in 2009, and $3.5 million in 2010. These amounts may change as a result of modifications to the project cost estimate or timing differences.
As of December 31, 2007, MGE's remaining capital commitments for the Top of Iowa III wind project are estimated to be $9.0 million and is expected to be expended in 2008. Included in this amount is $8.7 million, which has been accrued and recorded as construction work in progress at December 31, 2007. These amounts may change as a result of modifications to the project cost estimate or timing differences.
MGE Energy used funds received as dividend payments from MGE and MGE Power West Campus as well as short- and long-term external financing to meet its 2007 capital requirements and cash obligations, including dividend payments. External financing included short-term financing under existing lines of credit and proceeds from equity issued under the Distribution Agreement with JP Morgan and the Stock Plan.
Financing Activities
MGE Energy
2007 vs. 2006
Cash provided by MGE Energy's financing activities was $59.0 million for 2007, compared to cash used for financing activities of $6.9 million for 2006. For the year ended December 31, 2007, net short term debt borrowings were $46.5 million compared to net short term debt repayments of $25.5 million for the same period in the prior year. During the year ended December 31, 2007, MGE Energy's major capital expenditures (Top of Iowa III wind project and Elm Road project) were primarily funded with short-term debt, the issuance of common stock and additional long-term debt.
MGE Energy received $32.8 million and $17.1 million in cash proceeds as the result of stock issued during the twelve months ended December 31, 2007 and 2006, respectively. This increase is attributable to stock issued under the Stock Plan and stock issued pursuant under the Distribution Agreement.
Cash dividends paid on common stock during the year ended December 31, 2007, were $30.3 million compared to $28.5 million for the same period in the prior year. This increase is a result of a higher dividend per share ($1.41 vs. $1.39) and an increase in the number of shares outstanding.
During the twelve months ended December 31, 2007, MGE Energy repaid its outstanding obligation for its 7.49% medium-term notes which came due September 20, 2007 ($15.0 million) and issued $25.0 million in 6.247% medium-term notes due September 15, 2037.
2006 vs. 2005
Cash used by MGE Energy's financing activities was $6.9 million for 2006, compared to cash provided by financing activities of $22.2 million for 2005. For the year ended December 31, 2006, net short term debt repayments were $25.5 million compared to net short-term debt borrowings of $29.2 million for the same period in the prior year. As a result of atypically high fuel costs in the latter portion of 2005, short term debt borrowings were above normal levels at December 31, 2005. Namely, to fund the purchase of the related inventory (natural gas, purchased power, etc.), MGE Energy was required to rely more heavily on short-term financing. Conversely, during 2006, although short term debt levels were up for most of the year, there was a large decrease in these levels in December 2006. Namely, in December 2006 MGE used most of the net proceeds from a medium-term note issuance to repay short term debt obligations. See discussion of financing activities under MGE for further discussion of this issuance. Cash dividends paid on common stock during the year ended December 31, 2006, were $28.5 million compared to $28.1 million for the same period in the prior year. This increase is a result of a higher dividend per share ($1.39 vs. $1.37) and an increase in the number of shares outstanding.
The aforementioned increases in uses of cash, were offset by additional proceeds from stock issued. Proceeds under the Stock Plan were $9.7 million for the year ended December 31, 2006. This represents a $7.4 million increase from that received in the prior year. This increase is attributable to a change from using open market purchases during the most of 2005 to satisfy Stock Plan requirements to using newly issued shares starting June 1, 2006. Additionally, on November 9, 2006, MGE Energy entered into a Distribution Agreement with JP Morgan in which MGE Energy may offer and sell up to 1,500,000 shares of its common stock. During 2006, MGE Energy received $7.4 million in net proceeds from shares issued under the Distribution Agreement. These sales are made pursuant to an effective shelf registration statement MGE Energy filed with the SEC in March 2003.
MGE
2007 vs. 2006
During 2007, cash provided by MGE's financing activities was $56.2 million compared to cash used for financing activities of $2.4 million in 2006. During 2007, MGE had net short term borrowings of $31.5 million compared to net short term debt repayments of $36.5 million for the same period in the prior year. During the year ended December 31, 2007, MGE's major capital expenditures (Top of Iowa III wind project and Elm Road project) were primarily funded with short-term debt, equity contributions from MGE Energy and additional long-term debt.
During 2007, equity and affiliate financing received from MGE Energy by MGE Power West Campus and MGE Power Elm Road was $43.4 million compared to $27.3 million for the same period in the prior year. These equity contributions received by the aforementioned subsidiaries from MGE Energy are included in minority interest on the MGE consolidated balance sheet.
For the year ended December 31, 2007, cash dividends made by MGE, MGE Transco, and MGE Power West Campus were $28.7 million compared to $23.1 million for the same period in the prior year.
During the twelve months ended December 31, 2007, MGE repaid its outstanding obligation for its 7.49% medium-term notes which came due September 20, 2007 ($15.0 million) and issued $25.0 million in 6.247% medium-term notes due September 15, 2037.
Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's First Mortgage Bonds. The PSCW order limits the amount of dividends that MGE may pay MGE Energy when its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. Under those circumstances, MGE may not pay dividends in excess of $26.1 million plus dividends on shares issued in excess of the shares issued in the rate proceeding forecast if the proceeds are invested in MGE. MGE's common equity ratio at December 31, 2007, is estimated to be 53.1% as determined under the calculation used in the rate proceeding. MGE paid cash dividends of $15.6 million to MGE Energy in 2007. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness associated with MGE Power West Campus, which is consolidated in accordance with FIN 46(R) into MGE's financial statements.
MGE has covenanted with the holders of its First Mortgage Bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2007, approximately $186.0 million was available for the payment of dividends under this covenant.
2006 vs. 2005
During 2006, cash used for MGE's financing activities was $2.4 million compared to cash provided by financing activities of $42.6 million in 2005. During 2006, MGE had net short-term repayments of $36.5 million compared to net short-term debt borrowings of $25.7 million for the same period in the prior year. As a result of atypically high fuel costs in the latter portion of 2005, short term debt borrowings were above normal levels at December 31, 2005. Namely, to fund the purchase of the related inventory (natural gas, purchased power, etc.), MGE was required to rely more heavily on short-term financing. Conversely, during 2006 although short term debt levels were up for most of the year, there was a large decrease in these levels in December 2006. Namely, in December 2006 MGE used most of the net proceeds from a medium-term note issuance to repay short term debt obligations. See below for further discussion of this issuance.
During 2006, equity and affiliate financing received from MGE Energy by MGE Power West Campus, MGE Transco, and MGE Power Elm Road was $27.3 million compared to $33.9 million for the same period in the prior year. This decrease reflects the substantial completion of the WCCF project in April 2005 and the resulting decrease in capital needs for this project. These equity contributions received by the aforementioned subsidiaries from MGE Energy are included in minority interest on the MGE consolidated balance sheet.
These decreases in cash from financing activities were offset by decreases in the cash dividends and an increase in long term debt issued. Cash proceeds from long term debt issuances were $30 million in 2006 compared to $20 million in 2005. Namely, on December 29, 2006, MGE issued $30 million in 5.25% medium-term notes due January 15, 2017. On October 27, 2005, MGE Energy through its wholly owned subsidiary MGE Power West Campus issued $20.0 million of 5.19% senior secured notes due September 25, 2033.
For the year ended December 31, 2006, cash dividends made by MGE, MGE Transco, and MGE Power West Campus were $23.1 million compared to $36.3 million for the same period in the prior year.
Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's First Mortgage Bonds. The PSCW order limits the amount of dividends that MGE may pay MGE Energy when its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. Under those circumstances, MGE may not pay dividends in excess of $26.1 million plus dividends on shares issued in excess of the shares issued in the rate proceeding forecast if the proceeds are invested in MGE. MGE's common equity ratio at December 31, 2006, is estimated to be 53.1% as determined under the calculation used in the rate proceeding. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness associated with MGE Power West Campus, which is consolidated in accordance with FIN 46(R) into MGE's financial statements.
In addition, MGE has covenanted with the holders of its First Mortgage Bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2006, approximately $167.5 million was available for the payment of dividends under this covenant.
During 2006 and 2005, MGE's dividend payments were restricted under a PSCW rate order and its mortgage bond indenture. MGE's common equity ratio at December 31, 2005, was approximately 55.7% as determined under the calculation used in the PSCW rate proceeding. As of December 31, 2005, approximately $148.2 million was available for the payment of dividends under the covenant in MGE's mortgage bond indenture.
MGE Energy's capitalization ratios were as follows:
|
|
MGE Energy | ||
|
|
2007 |
|
2006 |
|
Common shareholders' equity |
53.9% |
|
54.8% |
|
Long-term debt* |
33.1% |
|
36.9% |
|
Short-term debt |
13.0% |
|
8.3% |
|
*Includes the current portion of long-term debt | |||
Below is a table of MGE's current credit ratings. MGE Energy is not rated because it has not issued any debt securities.
|
|
Standard & Poor's |
|
Moody's |
|
First Mortgage Bonds |
AA- |
|
Aa2 |
|
Unsecured debt |
AA- |
|
Aa3 |
|
Commercial paper |
A1+ |
|
P1 |
A security rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. MGE's access to the capital markets, including the commercial paper market, and its financing costs in those markets are dependent on its securities' ratings. None of MGE's borrowing is subject to default or prepayment due to downgrading of securities' ratings, although such a down grading could increase fees and interest charges under MGE's and MGE Energy's credit facilities.
Contractual Obligations and Commercial Commitments for MGE Energy and MGE
MGE Energy's and MGE's contractual obligations as of December 31, 2007, representing cash obligations that are considered to be firm commitments, are as follows:
|
(In thousands) |
|
|
Payment due within: |
|
Due after | ||||
|
|
Total |
|
1 Year |
|
2-3 Years |
|
4-5 Years |
|
5 Years |
|
MGE Energy |
|
|
|
|
|
|
|
|
|
|
Long-term debt (a) |
$ 263,500 |
|
$ 30,000 |
|
$ - |
|
$ 34,300 |
|
$199,200 |
|
Short-term debt (b) |
103,500 |
|
103,500 |
|
- |
|
- |
|
- |
|
Interest expense (c) |
258,181 |
|
14,924 |
|
27,269 |
|
26,528 |
|
189,460 |
|
Operating leases (d) |
21,585 |
|
2,650 |
|
3,789 |
|
2,895 |
|
12,251 |
|
Purchase obligations (e) |
409,802 |
|
74,039 |
|
84,799 |
|
45,384 |
|
205,580 |
|
Other obligations (f) |
4,252 |
|
3,063 |
|
467 |
|
565 |
|
157 |
|
Purchase obligations-Elm Road (g) |
72,046 |
|
48,031 |
|
24,015 |
|
- |
|
- |
|
Purchase obligations - Top of Iowa III (j) |
9,004 |
|
9,004 |
|
- |
|
- |
|
- |
|
Purchase obligations-Columbia environmental (i) |
868 |
|
868 |
|
- |
|
- |
|
- |
|
Total MGE Energy contractual obligations |
$1,142,738 |
|
$286,079 |
|
$140,339 |
|
$109,672 |
|
$606,648 |
|
MGE |
|
|
|
|
|
|
|
|
|
|
Long-term debt (a) |
$ 263,500 |
|
$ 30,000 |
|
$ - |
|
$ 34,300 |
|
$199,200 |
|
Short-term debt (h) |
61,000 |
|
61,000 |
|
- |
|
- |
|
- |
|
Interest expense (c) |
258,181 |
|
14,924 |
|
27,269 |
|
26,528 |
|
189,460 |
|
Operating leases (d) |
21,585 |
|
2,650 |
|
3,789 |
|
2,895 |
|
12,251 |
|
Purchase obligations (e) |
409,802 |
|
74,039 |
|
84,799 |
|
45,384 |
|
205,580 |
|
Other obligations (f) |
3,492 |
|
2,303 |
|
467 |
|
565 |
|
157 |
|
Purchase obligations-Elm Road (g) |
72,046 |
|
48,031 |
|
24,015 |
|
- |
|
- |
|
Purchase obligations - Top of Iowa III (j) |
9,004 |
|
9,004 |
|
- |
|
- |
|
- |
|
Purchase obligations-Columbia environmental (i) |
868 |
|
868 |
|
- |
|
- |
|
- |
|
Total MGE contractual obligations |
$1,099,478 |
|
$242,819 |
|
$140,339 |
|
$109,672 |
|
$606,648 |
For additional information about:
(a)
Long-term debt consisting of secured First Mortgage Bonds, unsecured medium-term notes, and Industrial Development Revenue Bonds issued by MGE, and private placement debt issued by MGE Power West Campus. See Footnote 9 of the Notes to Consolidated Financial Statements.
(b)
Short-term debt consisting of commercial paper for MGE and borrowings under MGE Energy lines of credit, see Footnote 10 of the Notes to Consolidated Financial Statements.
(c)
Amount represents interest expense on long-term facilities. See Footnote 9 of the Notes to Consolidated Financial Statements for further discussion of the long term debt outstanding at December 31, 2007.
(d)
Operating leases. See Footnote 18 of the Notes to Consolidated Financial Statements.
(e)
Purchase obligations for MGE consist of the purchase of electricity and natural gas, electric transmission, natural gas storage capacity, natural gas pipeline transportation, and the purchase and transport of coal. See Footnote 18 of the Notes to Consolidated Financial Statements for additional discussion.
(f)
Other obligations are primarily related to investment commitments and charitable donations. Also included is the liability related to FIN 48. For additional information on the unrecognized tax benefit, see Footnote 12 of the Notes to Consolidated Financial Statements.
(g)
Purchase obligations for MGE and MGE Energy related to contracts for equipment and services related to the construction of Elm Road. See Footnotes 18 and 21 of the Notes to Consolidated Financial Statements.
(h)
Short-term debt consisting of commercial paper. See Footnote 10 of the Notes to Consolidated Financial Statements.
(i)
Contractual commitments for certain services and capital at the jointly owned Columbia plant that will be acquired to ensure compliance with certain environmental initiatives.
(j)
Purchase obligations for MGE and MGE Energy related to contracts for equipment and services related to the construction of the Top of Iowa III wind project. See Footnotes 18 and 22 of the Notes to Consolidated Financial Statements.
The above amounts do not include any contributions that may be made for MGE's pension and postretirement plans. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, management is unable to estimate these amounts at this time. During 2007 MGE made $6.3 million in employer contributions primarily related to the 2006 plan year. Additionally, in 2008 MGE made a $5.4 million contribution to the pension and other postretirement plans related to the 2007 plan year. These payments were made strictly at MGE's discretion as there were no contributions required related to the 2007 or 2006 plan year.
MGE Energy's and MGE's commercial commitments as of December 31, 2007, representing commitments triggered by future events and including financing arrangements to secure obligations of MGE Energy and MGE, and guarantees by MGE, are as follows:
|
|
|
|
Expiration within: |
|
Due after | ||||
|
(In thousands) |
Total |
|
1 Year |
|
2-3 Years |
|
4-5 Years |
|
5 Years |
|
MGE Energy |
|
|
|
|
|
|
|
|
|
|
Available lines of credit (a) |
$155,000 |
|
$20,000 |
|
$135,000 |
|
$ - |
|
$ - |
|
Guarantees (b) |
3,994 |
|
1,058 |
|
1,461 |
|
834 |
|
641 |
|
MGE |
|
|
|
|
|
|
|
|
|
|
Available lines of credit (c) |
$75,000 |
|
$20,000 |
|
$55,000 |
|
$ - |
|
$ - |
|
Guarantees (d) |
3,841 |
|
966 |
|
1,400 |
|
834 |
|
641 |
(a)
Amount includes those facilities discussed in (c) plus an additional line of credit. MGE Energy has available at any time a $80.0 million committed revolving credit agreement, expiring in December 2010. At December 31, 2007, MGE Energy had borrowed $42.5 million under this credit facility. Accordingly, MGE Energy's available credit under this credit facility was $37.5 million at December 31, 2007.
(b)
Amounts include those guarantees described in (d) as well as guarantees held by MGE Energy. Also, MGE Energy has guaranteed debt service payments on a development project.
(c)
Amounts include a five-year, $55.0 million committed revolving credit agreement expiring in December 2010, and an additional $20.0 million line of credit that matures on March 31, 2008. Each credit facility is used to support commercial paper issuances. At December 31, 2007, there were no borrowings under either credit facility. At December 31, 2007, there was $61.0 million of commercial paper outstanding.
(d)
MGE has guaranteed repayment of certain receivables it sold to a financial institution under a chattel paper agreement. See Footnote 18 of the Notes to Consolidated Financial Statements.
Restructuring Activities
On January 19, 2006, MGE announced a plan, subject to certain conditions, that includes discontinuing coal use at the end of 2011 at Blount. The plant will continue to run on natural gas but will be reduced from its current approximate 190 MW capacity to 100 MW when coal burning is discontinued. MGE has determined that certain employee positions will be eliminated in 2011 as a result of this exit plan.
On January 19, 2006, MGE entered into severance agreements providing severance benefits to the nonunion employees affected by the exit plan. Additionally, on September 21, 2006, MGE ratified a labor agreement with the IBEW providing those union employees impacted by the exit plan with involuntary and voluntary severance benefits. The nonunion and union benefits are expected to be paid as follows: $0.1 million in 2008, $0.2 million in 2010, and $1.4 million in 2011.
MGE will recover in rates the costs associated with the discontinuance of coal at Blount. As such, the severance charges for these employees have been deferred and recognized on the consolidated balance sheet of MGE Energy and MGE as a regulatory asset.
Other Factors
Due to the performance of the United States debt and equity markets, the value of assets held in trusts to satisfy the obligations of pension and postretirement benefit plans may vary.
Critical Accounting Policies - MGE Energy and MGE
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to unbilled revenues, pension obligations, income taxes, derivatives, and regulatory assets and liabilities. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Unbilled Revenues
Revenues from the sale of electricity and gas to customers are recorded when electricity/gas is delivered to those customers. The quantity of those sales is measured by customers' meters. Due to the large volume of those meters, it is impractical to read all of them at month end. Meters are read on a systematic basis throughout the month based on established meter-reading schedules. Consequently, at the end of any month, there exists a quantity of electricity and gas that has been delivered to customers but has not been captured by the meter readings. As a result, management must estimate revenue related to electricity and gas delivered to customers between their meter-read dates and the end of the period. These estimates include:
•
The amount of electricity expected to be lost in the process of its transmission and distribution to customers (line loss) and the amount of electricity actually delivered to customers.
•
The amount of gas expected to be lost in the process of its distribution to customers and the amount of gas actually delivered to customers.
•
The mix of sales between customer rate classes, which is based upon historical utilization assumptions.
MGE monitors the reasonableness of the unbilled revenue estimate through the review of ratios such as unbilled electric receivables to billed electric sales. MGE expects that this ratio will be in the range of 40% to 60%.
Allowance for Doubtful Accounts
MGE maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. It determines the allowance based on historical write-off experience, regional economic data, and review of the accounts receivable aging. The Company reviews its allowance for doubtful accounts monthly. Although management believes that the allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses, if the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Pension and Other Postretirement Benefit Plans
MGE provides employees with certain retirement (pension) and postretirement (health care and life insurance) benefits. In order to measure the expense and obligations associated with these benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, the expected return on plan assets set aside to fund these costs, the rate of compensation increase, employee turnover rates, retirement rates, health care trends, mortality rates, and other factors. These accounting estimates bear the risk of change due to the uncertainty attached to the estimate as well as the fact that these estimates are difficult to measure. Different estimates used by us could result in recognizing different amounts of expense over different periods of time.
We use third-party specialists to assist us in evaluating our assumptions as well as appropriately measure the costs and obligations associated with these retirement benefits. The discount rate and expected return on plan assets are based primarily on investment yields available and the historical performance of our plan assets. They are critical accounting estimates because they are subject to management's judgment and can materially affect net income.
•
Assumed return on assets. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested (or to be invested) to provide for the benefits included in the projected benefit obligation. For 2007, MGE used an assumed return on assets of 9.0% for pension and 7.85% for other postretirement benefits. One of the approaches MGE used in determining its assumed return on assets is based on historical returns. As of December 31, 2007, the ten-year historical return was 10.14%. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $1.5 million, before taxes.
•
Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount rate.
•
Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care charges.
See Footnote 13 for additional discussion of these plans.
Income Tax Provision
MGE Energy's and MGE's income tax provisions, including both current and deferred components, are based on estimates, assumptions, calculations, and interpretation of tax statutes for the current and future years. Determination of current-year federal and state income tax will not be settled for years.
Management regularly makes assessments of tax return outcomes relative to financial statement tax provisions and adjusts the tax provisions in the period when facts become final.
Additionally, in determining our current income tax provision we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. When we maintain deferred tax assets, we assess the likelihood that these assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not more likely than not, we establish a valuation allowance. We record an allowance reducing the asset to a value we believe will be recoverable based on our expectation of future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets, and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition, derecognition, and measurement is based on management's best judgement given the facts, circumstances and information available at the reporting date. MGE Energy and MGE adopted the provisions of FIN 48 on January 1, 2007.
Accounting for Derivative Instruments
MGE accounts for derivative financial instruments under SFAS No. 133, Accounting for Derivatives and Hedging Activities, and SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. Under the provisions of SFAS No. 133, all derivatives except those qualifying for the normal purchase normal sale exception are recognized on the balance sheet at their fair value. Fair value is determined using current quoted market prices.
In the third quarter of 2002, MGE received approval from the PSCW to establish a regulatory asset or liability for the deferral of the effects of mark-to-market accounting as required by SFAS No. 133 on contracts related to MGE's regulated operations.
Regulatory Assets/Liabilities
Regulatory assets represent costs that have been deferred to future periods when it is probable that the regulator will allow future recovery of those costs through rates. MGE bases its assessment of recovery by precedents established by the regulatory body. Regulatory liabilities represent previous collections from customers that are expected to be refunded to customers in future periods. Regulatory assets and regulatory liabilities typically include deferral of energy costs, the normalization of income taxes, the deferral of certain operating expenses, and non-SFAS No. 143 removal cost. The accounting for these regulatory assets and liabilities is in accordance with the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
MGE continually assesses whether the regulatory assets and liabilities meet the criteria for probability of future recovery. This assessment considers factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction, and the status of any pending or potential deregulation legislation. If future recovery of costs becomes no longer probable, the assets and liabilities would be recognized as current-period revenues or expenses.
Amortization of regulatory assets and liabilities is provided over the recovery period as allowed in the related regulatory agreement.
Conditional ARO
As of December 31, 2005, MGE adopted FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" (FIN 47). FIN 47 clarified that a legal obligation associated with the retirement of a long-lived asset whose timing and/or method of settlement are conditional on a future event is within the scope of SFAS No. 143. Under FIN 47, MGE is required to record a conditional ARO at its estimated fair value if that fair value can be reasonably estimated.
The adoption of FIN 47 required MGE to update an existing inventory of AROs, originally created for the adoption of SFAS No. 143, and to determine which, if any, of the conditional AROs could be reasonably estimated. The ability to reasonably estimate a conditional ARO was a matter of management judgment, based upon management's ability to estimate a settlement date or range of settlement dates and a method or potential method of settlement of its conditional AROs. In determining whether our conditional AROs could be reasonably estimated, management considered past practices, industry practices, management's intent, and the estimated economic life of the assets. The fair value of the conditional AROs was then estimated using an expected present value technique. Changes in management's assumptions regarding settlement dates, settlement methods, or assigned probabilities could have a material effect on the liability recorded at December 31, 2007. The liabilities associated with conditional AROs will be adjusted on an ongoing basis due to the passage of time and revisions to either the timing or the amount of the original estimates of undiscounted cash flows. These adjustments could have a significant impact on the Consolidated Balance Sheets. For more information regarding FAS 143/FIN 47, see Footnote 20 of the Notes to Consolidated Financial Statements.
Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy and MGE
SFAS 157
In September 2006, the FASB issued FASB Statement 157, Fair Value Measurements (SFAS 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability. SFAS 157 will be effective as of January 1, 2008. MGE and MGE Energy have created an inventory of items under the scope of this standard. This inventory primarily includes marketable securities and derivatives. The adoption of this standard does not materially impact MGE Energy's and MGE's financial statements. This standard will however require additional disclosure within the footnotes.
SFAS 159
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. This statement allows companies to choose to measure certain financial instruments and other items at fair value at specified election dates. Per the provisions of this standard, companies are permitted to choose the fair value option on an instrument-by-instrument basis. MGE has not elected to early adopt this statement. Accordingly, SFAS 159 is effective for MGE as of January 1, 2008. MGE has assessed this standard and the related implications. Based on this assessment, MGE has concluded that on January 1, 2008, it will not elect the fair value option available under this standard.
Pension Protection Act
During the third quarter of 2006, President Bush signed into law the Pension Protection Act of 2006, which will affect the manner in which companies, including MGE and MGE Energy, administer their pension plans. This legislation will require companies to, amongst other things, increase the amount by which they fund their pension plans, pay higher premiums to the Pension Benefit Guaranty Corporation if they sponsor defined benefit plans, amend plan documents and provide additional plan disclosures in regulatory filings and to plan participants. This legislation will be effective as of January 1, 2008. The U.S. Treasury Department's interim guidance indicates that further guidance is forthcoming. MGE does not expect significant changes in expected cash flows as a result of the Act. Absent changes in plan design as a result of the Act, the Act is not expected to materially impact MGE and MGE Energy's results of operations.
FSP FIN 39-1
In April 2007, the FASB issued FSP 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). This pronouncement amends FIN 39, Offsetting of Amounts Related to Certain Contracts, and allows companies to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. MGE and MGE Energy will be electing the accounting policies prescribed by this pronouncement. FSP FIN 39-1 will be effective for MGE and MGE Energy as of January 1, 2008. The effects of applying this pronouncement shall be recognized as a change in accounting principle through retroactive application for all financial statements presented unless it is impracticable to do so. The adoption of this pronouncement will have no impact on MGE or MGE Energy's net income.
FAS 160 and FAS 141(R)
In December 2007, the FASB issued FAS 160, Non-Controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 and FAS 141(R), Business Combinations. These pronouncements will change the accounting and reporting for business acquisitions and noncontrolling interest in a subsidiary. In addition, FAS 160 will change the accounting and reporting for the deconsolidation of a subsidiary. FAS 160 and FAS 141(R) will be effective for MGE and MGE Energy as of January 1, 2009. MGE and MGE Energy are currently assessing the impact these pronouncements will have on their financial statements.
Inflation
The current financial statements report operating results in terms of historical cost, but they do not evaluate the impact of inflation. Because utilities can depreciate only the original cost of utility plant, there may not be adequate cash flows from existing plant to replace this investment. Under PSCW rate treatment, projected operating costs, including the impacts of inflation, are recovered in revenues.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - MGE Energy and MGE.
MGE Energy and MGE are potentially exposed to market risk associated with interest rates, commodity prices, weather, and equity returns. MGE currently has no exposure to foreign currency risk. MGE manages some risk exposure through risk management policies and the use of derivative instruments. MGE's risk management policy prohibits speculative trading transactions.
Weather Risk
MGE's sales forecasts, used to establish rates, are set by the PSCW based upon estimated temperatures, which approximate 20-year averages. MGE's electric revenues are sensitive to the summer cooling season and, to some extent, to the winter heating season. A significant portion of MGE's gas system demand is driven by heating. MGE's gas margin (revenues less gas purchased) is collected under a combination of fixed and volumetric rates set by the PSCW based on "normal weather." As a result of weather-sensitive demand and volumetric rates, a portion of MGE's gas margin is at risk for warmer-than-normal weather. MGE may use weather derivatives, pursuant to its risk management program, to reduce the impact of weather volatility on its gas margin.
On September 26, 2007, MGE entered into a non-exchange traded weather derivative. This agreement extends from January 2008 until March 2008. This agreement has a premium of $0.2 million. Under this agreement, MGE is subject to a floor and a ceiling based on forecasted heating degree days during the indicated period. If heating degree days are below the floor, MGE is entitled to receive payment, and if actual heating degree days exceed the ceiling, MGE is obligated to make a payment. Any payment or receipt is limited to $1.3 million. MGE accounts for HDD Collars using the intrinsic value method pursuant to the requirements of EITF No. 99-2, Accounting for Weather Derivatives.
MGE may also be impacted by extreme weather conditions. Such conditions may damage critical operating assets or may negatively impact the price of commodity and other costs.
A summary of actual weather information in the utility segment's service territory during 2007, 2006, and 2005, as measured by degree days, may be found in Results of Operations.
Commodity Price Risk
MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE employs established policies and procedures to reduce the market risks associated with changing commodity prices. MGE's commodity risks are somewhat mitigated by the current ratemaking process in place for recovering electric fuel cost, purchased energy costs, and the cost of natural gas. MGE's electric fuel costs are subject to fuel rules established by the PSCW. Under the electric fuel rules, MGE may be required to refund to customers if the fuel rules costs fall outside the lower end of the range and would be allowed to request a surcharge if the fuel rules costs exceeded the upper end of the range. The range is defined by the PSCW and has been modified throughout the years based on market conditions and other relevant factors. Pursuant to the PSCW order issued on December 14, 2007, MGE's will be subject to a plus or minus 2% range. MGE's gas segment is governed by the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to customers the cost of gas , subject to certain limited incentives. Under both the electric fuel rules and PGA clause, MGE may include in the cost of fuel (natural gas or power) the costs and benefits of fuel price risk management tools implemented under the risk management plan approved by the PSCW.
MGE also reduces price risk caused by market fluctuations via physical contracts and derivative contracts, including futures, swaps, options, forwards, and other contractual commitments. Under MGE's risk management plan, the maximum length of time over which cash flows related to energy commodities are currently being cash-flow hedged is one year. MGE's energy contracts are accounted for under SFAS 133. Many of the contracts qualify for the normal purchase and sales exemption to SFAS 133. Those that do not qualify for this exemption are recorded as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivative instruments are recorded in current earnings or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is designated as, and is effective as, a hedge and depending on the type of hedge transaction.
If the derivative qualifies for regulatory deferral subject to the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, the derivatives are marked to fair value pursuant to SFAS No. 133 and are offset with a corresponding regulatory asset or liability.
At December 31, 2007, MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric segments. These contracts are primarily comprised of exchange-traded option and future contracts to manage the cost of gas. MGE also holds FTRs which are used to hedge the risk of increased congestion charges. At December 31, 2007, the cost basis of these instruments exceeded their fair value by $0.3 million. Under the PGA clause and electric fuel rules, MGE may include in the costs of fuel (natural gas or power) the costs and benefits of the aforementioned fuel price risk management tools. Because these costs and benefits are recoverable, the related unrealized gain has been deferred on the balance sheet as a regulatory asset.
During 2007, MGE has also entered into futures and basis swaps to take advantage of physical and financial arbitrage opportunities between supply basins and pricing spreads between future months' gas supply. Under the incentive mechanism within the PGA Clause, MGE shareholders have the ability to receive 50% of the benefits or loss from these deals if certain thresholds are achieved. At December 31, 2007, these positions were in an unrealized gain position of $0.2 million. Of this amount, 50% is reflected in other comprehensive income and 50% is reflected as a regulatory asset pursuant to a rate order issued by the PSCW.
MGE's energy contracts are valued using readily available NYMEX pricing data.
Interest Rate Risk
Both MGE and MGE Energy have short term borrowings at varying interest rates. MGE issues commercial paper for its short-term borrowings, while MGE Energy draws from its current credit facility to meet its short term borrowing needs (see Footnote 10 of the Notes to Consolidated Financial Statements). Borrowing levels vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels. MGE Energy and MGE manage interest rate risk by limiting their variable rate exposure and continually monitoring the effects of market changes on interest rates. MGE is not exposed to changes in interest rates on a substantial portion of its long-term debt until that debt matures and is refinanced at market rates. Assuming the current level of variable rate borrowings and assuming a 1% change in the 2007 average interest rate under these borrowings, it is estimated that our 2007 interest expense and net income would have changed by $0.6 million for MGE and $1.0 million for MGE Energy.
Equity Price Risk - Pension-Related Assets
MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various investment managers. Changes in market value of these investments can have an impact on the future expenses related to these liabilities. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $1.5 million, before taxes. MGE's risk of expense and annuity payments, as a result of changes in the market value of the trust funds, is mitigated in part through future rate actions by the PSCW.
Regulatory Recovery Risk
MGE's electric operations burn natural gas in several of its peak power plants or as a supplemental fuel at several coal-fired plants and, in many cases, the cost of purchased power is tied to the cost of natural gas. MGE bears significant regulatory risk for the recovery of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure.
As noted above in Commodity Price Risk, the electric operations of MGE operate under a "fuel rules" adjustment clause for fuel and purchased power costs associated with the generation and delivery of electricity. This clause establishes a base rate for fuel and purchased power. Pursuant to a PSCW rate order issued on December 14, 2007, effective January 1, 2008, MGE is subject to a fuel rules bandwidth of -2% to +2%. MGE may be required to refund to customers if the fuel rules costs fall outside the lower end of the range (-2%), and would be allowed to request a surcharge if the fuel rules costs exceeded the upper end of the range (+2%). MGE assumes the risks and benefits of variances that are within the 2% bandwidth. For 2008, fuel and purchased power costs included in MGE's base fuel rates are $119.1 million.
Credit Risk - Counterparty
Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily through its merchant energy business. MGE uses credit policies to manage its credit risk, which includes utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as collateral or prepayment arrangements, and using netting agreements.
Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example, fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact on its financial results.
Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses on accrual contracts.
MGE is obligated to provide service to all electric and gas customers within its respective franchised territories. MGE's franchised electric territory includes a 315 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,625 square miles in Wisconsin. For the year ended December 31, 2007, no one customer constituted more than 7% of total operating revenues for MGE and MGE Energy. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.
Cash, cash equivalents, and customer accounts receivable are the financial instruments that potentially subject MGE Energy and MGE to concentrations of credit risk. MGE Energy and MGE place their cash and cash equivalents with high credit-quality financial institutions. MGE has limited concentrations of credit risk from customer accounts receivable because of the large number of customers and strong economy in its service territory.
Item 8. Financial Statements and Supplementary Data.
MGE Energy
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
February 26, 2008
MGE
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15f. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
February 26, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of MGE Energy, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of MGE Energy, Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2008
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholder of Madison Gas and Electric Company:
In our opinion, the accompanying consolidated balance sheets and the related consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Madison Gas and Electric Company and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2008
MGE Energy, Inc.
Consolidated Statements of Income
(In thousands, except per-share amounts)
|
|
For the years ended December 31, | ||||
|
|
2007 |
|
2006 |
|
2005 |
|
Operating Revenues: |
|
|
|
|
|
|
Regulated revenues |
$532,413 |
|
$504,138 |
|
$511,517 |
|
Nonregulated revenues |
5,181 |
|
3,408 |
|
1,853 |
|
Total Operating Revenues |
537,594 |
|
507,546 |
|
513,370 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
Fuel for electric generation |
56,694 |
|
49,227 |
|
65,016 |
|
Purchased power |
77,594 |
|
77,164 |
|
81,676 |
|
Natural gas purchased |
140,838 |
|
129,331 |
|
146,110 |
|
Other operations and maintenance |
130,831 |
|
126,086 |
|
117,552 |
|
Depreciation and amortization |
32,199 |
|
31,342 |
|
29,275 |
|
Other general taxes |
15,771 |
|
15,402 |
|
13,269 |
|
Total Operating Expenses |
453,927 |
|
428,552 |
|
452,898 |
|
Operating Income |
83,667 |
|
78,994 |
|
60,472 |
|
|
|
|
|
|
|
|
Other income, net |
6,069 |
|
4,329 |
|
4,938 |
|
Interest expense |
(13,056) |
|
(15,001) |
|
(13,448) |
|
Income before income taxes |
76,680 |
|
68,322 |
|
51,962 |
|
Income tax provision |
(27,855) |
|
(25,899) |
|
(19,871) |
|
Net Income |
$ 48,825 |
|
$ 42,423 |
|
$ 32,091 |
|
|
|
|
|
|
|
|
Earnings Per Share of Common Stock (basic and diluted): |
$2.27 |
|
$2.06 |
|
$1.57 |
|
|
|
|
|
|
|
|
Dividends paid per share of common stock |
$1.41 |
|
$1.39 |
|
$1.37 |
|
|
|
|
|
|
|
|
Average Shares Outstanding (basic and diluted) |
21,520 |
|
20,564 |
|
20,436 |
The accompanying notes are an integral part of the above consolidated financial statements.
MGE Energy, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
|
For the years ended December 31, | ||||
|
|
2007 |
|
2006 |
|
2005 |
|
Operating Activities: |
|
|
|
|
|
|
Net income |
$ 48,825 |
|
$ 42,423 |
|
$ 32,091 |
|
Items not affecting cash: |
|
|
|
|
|
|
Depreciation and amortization |
32,199 |
|
31,342 |
|
29,275 |
|
Deferred income taxes |
750 |
|
5,241 |
|
10,900 |
|
Amortization of investment tax credits |
(410) |
|
(432) |
|
(460) |
|
Amortization of debt issuance costs and discount |
543 |
|
595 |
|
493 |
|
Provision for doubtful accounts receivable |
3,080 |
|
3,230 |
|
2,080 |
|
AFUDC-equity funds |
(1,927) |
|
(554) |
|
(414) |
|
Employee benefit plan expenses |
8,101 |
|
10,178 |
|
9,665 |
|
Equity earnings in ATC |
(6,047) |
|
(5,317) |
|
(4,871) |
|
Reserve for fuel refund |
- |
|
2,312 |
|
- |
|
Gain on sale of investments |
(778) |
|
- |
|
- |
|
Other items |
1,950 |
|
653 |
|
1,109 |
|
Changes in working capital items: |
|
|
|
|
|
|
Restricted cash - margin account |
694 |
|
(1,080) |
|
- |
|
Trade and other receivables, net |
(12,574) |
|
14,791 |
|
(18,855) |
|
Inventories |
4,099 |
|
(3,717) |
|
(12,468) |
|
Unbilled revenues |
(4,332) |
|
4,394 |
|
(5,552) |
|
Other current assets |
(274) |
|
(3,771) |
|
2,052 |
|
Retainage receivable |
75 |
|
2,425 |
|
2,500 |
|
Accounts payable |
3,608 |
|
(4,226) |
|
7,014 |
|
Accrued interest and taxes |
667 |
|
101 |
|
2,979 |
|
Other current liabilities |
(457) |
|
(174) |
|
(1,478) |
|
Proceeds from Congestion Cost and Line Loss Allocation Agreement |
2,545 |
|
- |
|
- |
|
Dividend income from ATC |
4,441 |
|
4,003 |
|
3,550 |
|
Cash contributions to pension and other postretirement plans |
(6,346) |
|
(5,779) |
|
(5,536) |
|
Other noncurrent items, net |
(1,846) |
|
4,401 |
|
(697) |
|
Cash Provided by Operating Activities |
76,586 |
|
101,039 |
|
53,377 |
|
Investing Activities: |
|
|
|
|
|
|
Capital expenditures |
(136,258) |
|
(92,575) |
|
(85,771) |
|
Repayment from ATC related to WCCF |
- |
|
- |
|
12,964 |
|
Capital contributions to ATC and other investments |
(255) |
|
(1,974) |
|
(1,686) |
|
Advance to WEPCO for ATC work related to Elm Road |
(138) |
|
(808) |
|
(1,599) |
|
Proceeds from sale of property to ATC |
724 |
|
- |
|
- |
|
Other |
1,136 |
|
916 |
|
359 |
|
Cash Used for Investing Activities |
(134,791) |
|
(94,441) |
|
(75,733) |
|
Financing Activities: |
|
|
|
|
|
|
Issuance of common stock, net |
32,786 |
|
17,050 |
|
2,259 |
|
Issuance (purchase) of treasury stock |
- |
|
119 |
|
(119) |
|
Cash dividends paid on common stock |
(30,295) |
|
(28,513) |
|
(28,054) |
|
Repayment of long-term debt |
(15,000) |
|
- |
|
- |
|
Issuance of long-term debt |
25,000 |
|
30,000 |
|
20,000 |
|
Increase (decrease) in short-term debt |
46,500 |
|
(25,500) |
|
29,225 |
|
Other |
- |
|
(82) |
|
(1,128) |
|
Cash Provided by (Used for) Financing Activities |
58,991 |
|
(6,926) |
|
22,183 |
|
Change in Cash and Cash Equivalents: |
786 |
|
(328) |
|
(173) |
|
Cash and cash equivalents at beginning of period |
3,003 |
|
3,331 |
|
3,504 |
|
Cash and cash equivalents at end of period |
$ 3,789 |
|
$ 3,003 |
|
$ 3,331 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Interest paid |
$13,736 |
|
$16,693 |
|
$13,680 |
|
Income taxes paid |
$27,902 |
|
$20,530 |
|
$ 7,339 |
|
Income taxes received |
$(333) |
|
$ - |
|
$(3,313) |
The accompanying notes are an integral part of the above consolidated financial statements.
MGE Energy, Inc.
Consolidated Balance Sheets
(In thousands)
|
|
At December 31, | ||
|
ASSETS |
2007 |
|
2006 |
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
$ 3,789 |
|
$ 3,003 |
|
Restricted cash |
2,896 |
|
4,243 |
|
Accounts receivable, less reserves of $3,709 and $3,489, respectively |
43,668 |
|
33,397 |
|
Other accounts receivable, less reserves of $114 and $107, respectively |
3,397 |
||